Global central bankers, finance ministers and representatives from the private sector and civic groups gathered in Washington recently for the spring meetings of the IMF (International Monetary Fund)/World Bank Group. With trade policy, geopolitics and emerging markets currently top-of-mind for many investors, the meetings were especially relevant this year.
Below are our 10 key takeaways from the discussions.
- Politics trumps economics. More than ever, U.S. trade policy and sanctions are likely to dictate the path of 2018 asset prices in countries as diverse as China, Mexico, Russia and Venezuela. Along with the late-cycle fiscal stimulus in the U.S. and its impact on the Federal Reserve’s policy path, this means the fate of a sizeable portion of emerging markets (EM) rests in Washington.
- The White House focus on resetting the China-U.S. trade relationship suggests that the conflict with Beijing will take center stage in terms of policy and will not have an easy, near-term fix. This has created a sense that NAFTA is less of a priority, setting the stage for a potential muddle-through solution (with delays likely). The impact of trade frictions has been contained to the financial markets thus far, but some investors worry any escalation could start affecting the global real economy.
- The path of sanctions on Russia and Venezuela remains largely dependent on the intentions of Washington, specifically with regards to Russia. On the positive side, the likelihood of “draconian” sanctions that would prevent foreign investors from holding Russian sovereign debt appears remote. But with the likely re-election of President Nicolás Maduro in Venezuela, the noose of U.S./European sanctions on the Chavista leadership may tighten come summer.
- Elections bear watching, with Colombia, Mexico and Brazil headed to the polls in the next six months. In Brazil, the crowded field of contestants makes it difficult to guess the outcome. In Mexico, investors are trying to determine whether economic proposals from the presidential candidate (and very plausible winner) AMLO (Andrés Manuel López Obrador) risk unwinding recent efforts at fiscal consolidation.
- Attendees remain constructive on EM growth and inflation. They do not anticipate a period of EM stress, with the exception of idiosyncratic stories e.g., Turkey, where there are potential vulnerabilities to growth trajectories. The main potential spoiler continues to be rising U.S. interest rates.
- The outlook is equally benign for commodities, with production propping up many emerging economies. This bodes well for Gulf Cooperation Council credits such as Saudi Arabia, Qatar, Kuwait and Oman, but less so for oil importers like India.
- Investors are picking their spots and exercising ever more caution in country selection. Investing in EM is no longer a pure beta story. Few are willing to risk exposure to weaker credits like Lebanon, with debt at 150% of GDP and climbing.
- Even after the frantic pace of 2017, inflows into EM continue so far in 2018. While unlikely to drive valuations, the technical picture has remained supportive thus far.
- The search for dependable yield continues. Among the so-called “high yielders,” prospects appear brightest for Egypt and in Argentina the recent hike demonstrates the government’s commitment to currency stability.
- With Brazil rates at all-time lows, local investors were prominent at the meetings. Investors from the previously high-yielding country have joined the ranks of those on the lookout for new investment ideas: The search for yield is ever-evolving and moving geographically.
For more, please see “Emerging Markets: Standing Up to Higher Volatility.”
Yacov Arnopolin, Lupin Rahman and Vinicius Silva are emerging markets portfolio managers and contributors to the PIMCO Blog.