Because the US-China challenge is an advantage for Brazil and Mexico
Larger and more established emerging markets, such as Indonesia, Brazil, India and Mexico, will stand to benefit from competition between the United States and China. The analysis by Polina Kurdyavko, BlueBay Head of Emerging Markets and Senior Portfolio Manager of RBC BlueBay
When discussing potential headwinds for the remainder of the year, we find it necessary to focus on China. If we consider relations between the United States and China, the trend according to which, in the medium to long term, it is more probable that this relationship will worsen rather than improve is unfortunately quite evident. That said, the interconnections between economies are relatively high; therefore, blanket “Russia-style” sanctions are unlikely to be imposed on China.
Brazil, Mexico, India and more
On the bright side, the United States will need as many global allies as possible when this relationship deteriorates. This is where larger and more established emerging market countries, such as Indonesia, Brazil, India and Mexico, stand to benefit. We expect further trade agreements to be reviewed in favor of some emerging countries, such as Chile. We expect greater tolerance in relation to some monetary and fiscal policies and some emerging markets, such as Turkey, and we assume that several emerging economies take advantage of the largest geopolitical shuffle in 20 years.
Local market volatility will remain high
Over the past 18 months, we have seen local currency markets outperform dollar-denominated fixed income. Furthermore, according to our forecasts, this will continue in absolute terms. However, we expect volatility to remain elevated in local currency markets relative to hard currency markets. In particular, we emphasize that local currency market volatility is less likely to be driven by inflation surprises, but more likely to be driven by overall risks such as bipolar governments and negative news on both the fiscal and political fronts, which could result in local currency asset volatility.
What does the future have to offer
Considering the context we find ourselves in today and the drivers that will determine the performance between now and the end of the year, the majority of these drivers will be made up of the companies most in difficulty, which have undergone a restructuring on the credit plan and which are now achieving returns consistent with relation to fixed income.
Macroeconomically, the recent slowdown in US core inflation has been significant and reflects the likelihood that the Federal Reserve will need to make fewer hikes in the near term. While it is still too early to tell whether this drop in US inflation will be sustainable, it does have implications for emerging markets. In particular, it is constructive for local emerging markets, as expected US dollar weakness is likely to provide some relief to currency markets, at a time when many emerging market central banks are expected to initiate their own rate-cutting cycles .
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/mercati-emergenti-vantaggio-sfida-usa-cina/ on Sun, 20 Aug 2023 05:54:21 +0000.