- The anticipation of the mid-December Federal Reserve System hike dissuaded us from publishing an Outlook piece until we’ve had a chance to see just how much of a yawn the much-feared tightening would produce. The well-telegraphed move barely raised an eyebrow in Emerging Markets (“EM”).
- Instead, as we enter 2016, China concerns and oil prices have (rightly, in our view) occupied investors’ minds. We believe those factors, combined with (geo) politics, will remain key drivers behind EM asset prices in coming months.
- Clouds continue to hang over EM, but we see little in the way of a crisis on the horizon. There may be disappointments in store, but of the priced-in, garden variety.
- We look for 2016 to be the year where EM growth and EM foreign exchange bottom out. We don’t anticipate a rapid rebound or V-shaped recovery. Rather, we see EM turning the corner after three straight years of declining valuations and downward growth projections. Structural factors to justify optimism, ex-demographics, remain scarce, but whether it’s overshoot or base effects – that spells a pick-up nonetheless!
- The risks include policy mistakes, populism, depletion of reserves and the impact on struggling EM economies should their Central Banks choose to follow the Fed and hike rates.
