以下为此文英文原文：Emerging markets whack-a-mole is a distraction
by Paul Greer
During much of this year, emerging markets have resembled a giant game of country whack-a-mole. Just when you thought one idiosyncratic story was temporarily under control, another one popped up. Whether it was Turkish policy mistakes, Argentine capital flight, Brazilian political risk, South African land reform or Russian sanctions fears, there has been no shortage of negative headlines.
The result has been “EM contagion” fears hitting levels not seen in years. While the collection of country fragilities has not helped, however, we do not believe they have been the cause of EM’s weakness this year. Instead, they are a symptom of the overarching investment theme for 2018: US dollar liquidity withdrawal.
Tighter, faster, stronger
As the US economy expands rapidly and price pressures build, the Federal Reserve has kept its monetary policy tightening on autopilot. With recent activity data showing little sign of easing up, the pace of rate hikes looks set to continue into 2019, pushing front-end US yields to levels not witnessed since the global financial crisis.
Perhaps of more relevance to EM investors, however, is what the Fed has been doing with its balance sheet. With the pace of Fed quantitative tightening set to accelerate to $50bn a month in the fourth quarter, the continued contraction in the dollar value of world money supply will speed up.
This drainage of global dollar liquidity, especially offshore dollar liquidity, is hitting EM disproportionately hard. Non-resident portfolio flows into EM have dried up while US corporates are repatriating capital back home. All of this is likely to continue benefiting the US dollar, given the divergence in growth and interest-rate differentials between the US and the rest of the world. This remains a significant hurdle for the EM universe.
Trade, growth and inflation
Global trade tension is another dominant concern. It seems likely the escalating Sino-US tariff war will continue as Donald Trump plays to his core support ahead of November’s midterm elections. Given the unpredictable nature of US policy, and the heightened sensitivity of EM growth to global trade, the investment climate will remain uncertain.
Of course, EM growth momentum has already cooled this year as non-energy commodity prices drop, consumer sentiment wanes and monetary policy is tightened.
Many EM central banks have responded this year, either proactively or reactively, to currency weakness and rising inflation expectations, while others will soon do so. It is clear that the extraordinary rate easing cycle of 2017 is over and the path of travel is higher.
EM inflation has risen this year and is set for further upside as the dollar strengthens and the risks of another near-term El Niño weather event in the Pacific Ocean grow. This has the potential not only to impact domestic price pressures adversely in several EM countries, but also to push food prices higher globally.
Given this triple whammy of weaker currencies, slowing growth momentum and rising price pressures, EM inflation break evens still look cheap. Real yields appear attractive and the defensive characteristics of inflation-linked bonds can offer drawdown protection for dedicated investors during periods of risk aversion.
‘Turkgentina’
While these “big picture” themes have been playing out, it has been easy to focus solely on the litany of idiosyncratic horror stories across EM. Understandably, “Turkgentina” has been front and centre for the financial press given the extraordinary volatility of both the Turkish lira and the Argentine peso. The vulnerabilities of both countries have been well publicised but, even at this juncture, the worst may not yet be over, given the looming recessions in both countries and the political fallout from Argentina’s IMF programme.
It has also been a significant year for EM elections. Most have passed without major incident, although arguably the most contentious remains outstanding. Next month will bring a deeply divisive Brazilian election campaign to its conclusion and it is difficult to see a benign outcome for investors. With both extreme leftwing and rightwing candidates polling well, the likelihood of the winner having either the political willingness or the ability to enact desperately needed fiscal reforms looks low.
This month’s new deal roadshow from Papua New Guinea was a reminder of how quickly the EM sovereign universe has expanded in recent years. Since 2010, almost 30 sovereigns have issued debut external debt. Almost all have come from frontier markets. While this provides a healthy diversification of the universe, several of these countries have severe macro vulnerabilities of the kind that typically become more acute when global liquidity tightens.
The quality of research and data on frontier countries at an aggregate level across the market is patchy at best and many of these stories are poorly understood by foreign investors. It is plainly wrong to paint all frontier countries with the same brush — indeed some offer superb return potential — but it is worth remembering that the rapid expansion of the EM sovereign universe has created its own latent investment risks.
Value creation
To be sure, it is not all doom and gloom for EM. The drawdowns in the asset class this year have pushed risk premia much higher, so that valuations stack up more favourably than six months ago.
On the external debt side, there are great opportunities in some of the smaller, reform-oriented countries in Africa with high potential growth such as Ivory Coast, Rwanda and Angola. High quality sovereigns in the GCC region also look cheap, given their strong balance sheets, the elevated oil price and the potential for EM bond index inclusion next year.
In the local market space it is harder to identify value given our bullish opinion on the dollar but we see opportunities in domestic bonds in countries like Peru and Serbia, both with steep curves, generous real yields and low currency volatility. Mexican local bonds are another attractive option where both central bank credibility and real policy rates are sky high, while Nafta negotiations are exceeding market expectation.
What could prompt an EM turnround?
The most obvious signposts to watch for a recovery in our asset class are the Fed and China. Any hint of an about turn from the Fed, either on the rate hiking cycle or on balance sheet flows, would be a green light for risk assets. Given the current booming growth and tight labour market in the US, it is hard to see this happening anytime soon. However, as fiscal stimulus fades into 2019 and higher interest rates begin to bite on a late cycle, debt-laden economy, the potential for a slowdown is rising.
Equally, any meaningful fiscal stimulus from China, to accompany the monetary easing already witnessed this year, would likely be a major boon for EM growth and sentiment. China’s credit impulse is slowing and for now it is a delicate balancing act for the authorities between deleveraging the economy, regulating bank lending practices and preventing a rapid slowdown in growth.
While our short-term view remains bearish, the longer-term strategic case for EM is still very much in place. EM debt gives you access to a high growth, portfolio diversification and generous real yields. With 50 per cent of global GDP now coming from EM, and healthy Sharpe ratios over the cycle, it is clear the asset class cannot be ignored over the long term.
The autumn may bring more headlines and headwinds but seasoned EM watchers will be mindful of opportunities springing up over the coming months.
Paul Greer is portfolio manager, emerging market debt, at Fidelity International.
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发表于 2018-9-23 08:21
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