Emerging markets (EMs) are interesting. A trade war threatened to disrupt supply chains throughout Asia, while the prospect of rising US interest rates and a higher dollar prompted some capital flight in 2018.
All these pressures have diminished in recent months, however, and there are some early indications of cyclical recovery, such as strengthening activity indicators, lower exchange rate volatility and higher risk appetite, as well as corrections in external imbalances of laggard countries of 2018. Emerging market equities and debt have responded favourably.
The key question is whether all the good news is priced in: in our central scenario, we expect EMs to hold up well as a group, and idiosyncratic risk in some of the problematic countries seems to have diminished. Overall, thanks to easier global financial conditions translating into looser policies in EMs, stabilising Chinese growth in H2 2019, and an overall stable USD, 2019 looks set to be a good year for EMs as a whole. A pickup in global growth and trade would be the final ammunition needed to make 2019 an outstanding year for EMs.
Shamik Dhar, chief economist. BNY Mellon Investment Management