2016 was an interesting year for emerging markets – a tale of two extremes. On one hand, there was the coup d'état in Turkey, the recession in Brazil and the rising tension between Russia and the former Eastern Bloc. On the other hand, the low to negative interest rate environment across developed economies and abundance of liquidity in the markets have led to a revival of interest in emerging markets.
2017 is set to be another year of underwhelming growth in LatAm. We expect weaker currencies across the board with most economies set to cut rates in this environment, with the exception of Mexico. Peru continues to stand out as one of the fastest-growing economies in the region. However, it needs to demonstrate that such high growth rates are sustainable in the long run. Specifically, growth this year is likely to be supported by the potential jump in copper exports as new copper mines under construction start producing.
The year ahead has a range of risks both domestically and internationally impacting the EEMEA region. President Trump, geopolitics, European politics, G3 monetary policy and the resulting impact domestically are set to be the key drivers on the downside. There is possible upside with tighter labour markets, structural funds flowing more freely under the new seven-year semester, a stabilisation in eurozone demand, and more limited exposure to a negative demand shock from Asia.
Asia has so many large risks stacked to the downside that it is likely to be a stormy year with structurally slowing economies, its largest economy (China) in a late-stage credit cycle and the region’s vulnerability to President Trump’s protectionist policies.
In emerging Asia, we prefer India due to its strong growth outlook. Although the demonetization of high-denomination notes is likely to hurt near-term growth, stable growth and inflation, prudent macro policies and more reforms are setting the stage for a rise in potential growth. We expect India’s GDP to grow by 7.2% GDP in 2017, the fastest in Asia. India, in our view, is also the least exposed Asian economy to a more inward-looking US.
Emerging market economies are an extremely diverse group, yet they are often regarded as homogeneous by investors. A one-size-fits-all approach simply does not work for this asset class. While a year ago we labelled 2016 as a year of diverging paths between countries, we see more common themes and drivers for 2017 – albeit with different reactions between countries.Read more