Reviews & Outlooks | |
Reviews & Outlooks | |
1397 VIEWS | |
![]() |
Wednesday, January 15,
2020 / 04:45 PM / ARM Research / Header Image
Credit: Business Insider
After strong performance
(+10.6%) in the first half of the year, emerging markets equities had a
difficult third quarter (-5.1%) and rallied in the fourth quarter (+11.4%). The
third quarter slump was largely driven by heightening trade tension between US
and China over the period. Specifically, United States levied an additional 10%
tariff on US$300 billion worth of Chinese imports, labeled China a currency
manipulator, and threatened to de-list Chinese companies from American
exchanges. However, following reconciliatory talks that saw US reduced existing
tariffs on Chinese goods and cancelled additional planned tariffs as part of a
prospective Phase 1 trade deal, EM equities rallied in Q4 (+11.4%). In the
fixed income side of things, Emerging markets government bond spreads tightened
more than 28bps and 83bps in Q3 19 and Q4 19 respectively over comparable U.S
securities. This largely reflects investors' appetite for riskier assets in the
wake of accommodative monetary policy across most developed markets.
In charting the course for
portfolio flows to emerging market in 2020, we think developments around
heightening trade protectionism, the direction of monetary policy across
developed markets and prospects for commodity prices (especially crude oil)
would play a dominant role. On trade, the US and China finally agreed to the
phase one deal which provides temporary pause in the trade war. However,
possibilities of a flare up over the phase two agreement and tariff hike by the
US on importation of goods from Europe could spell doom for global growth and
investments. This is further exacerbated by our expectation for lower crude oil
prices (ARM forecast: $61.26/bl) in 2020 which does not bode well for the
fiscal conditions of most crude oil exporters. Notwithstanding, the dovish
monetary policy stance across most developed markets could serve as a push
factor for portfolio flows into emerging markets this year. This in addition to
International Monetary Fund's forecast for emerging market growth to accelerate
in 2020 and remain more than double that of developed markets makes valuations
for EM relatively attractive. Hence, we see scope for higher portfolio flows
into EMs in 2020.
Portfolio flows to emerging market loses steam in H2
2019
Portfolio flows to
emerging markets continued their downward spiral in Q3 19 with net inflow of
$50.7 billion (vs $117.8 billion and $76.1 in Q1 and Q2 19)- its second
consecutive quarterly decline. Of the two major asset classes, equity flows
have suffered the most from the twists and turns of trade tensions and several
country specific idiosyncrasies. On the other hand, declining interest rates in
developed markets and a decline in external credit spread (-28bps in Q3 2019)
have sustained debt portfolio flows to emerging markets.
Contrarily, in Q4 19 portfolio flows to EM showed some signs of
improvement. Specifically, debt portfolio flows sustained its positive run in
October and November, recording a $22.5 billion and $20.3 billion net inflow
respectively; albeit lagging the 2019 average of $27.2 billion. Equity
portfolio flows also turned positive in October and November, signaling a gradual
return of confidence in EM equity securities.
Emerging market assets blossom
After strong performance
(+10.6%) in the first half of the year, emerging markets equities had a
difficult third quarter (-5.1%) and rallied in the fourth quarter (+11.4%). The
third quarter slump was largely driven by heightening trade tension between US
and China over the period. Specifically, United States levied an additional 10%
tariff on US$300 billion worth of Chinese imports, labeled China a currency
manipulator, and threatened to de-list Chinese companies from American
exchanges. However, following reconciliatory talks that saw US reduce existing
tariffs on Chinese goods and cancel additional planned tariffs as part of a
prospective Phase 1 trade deal, EM equities rallied in Q4 (+11.4%).
In the fixed income side
of things, Emerging markets government bond spreads tightened more than 28bps
and 83bps in Q3 19 and Q4 19 respectively over comparable U.S securities. This
largely reflects investors' appetite for riskier assets in the wake of
accommodative monetary policy across most developed markets. To buttress, the
US Fed cut interest rate for the third time in 2019 by 25bps in October.
Furthermore, while the ECB left interest rate unchanged at an all-time low of
-0.5%, it announced the resumption of Quantitative easing at a monthly rate of
20 billion Euros.
Divergent fortunes across various EM counters
Despite heightening
uncertainty over the US-China trade deal, portfolio flows to China rose 4% to
$7.3 billion in Q3 19. This was largely driven by investors interest in Chinese
equities and bonds. For equities, portfolio flows to Chinese shares mirrored
government's effort to open its economy to foreign investors. For context,
Chinese equity received a boost from MSCI's 20% partial inclusion of China
A-shares in major indexes. Meanwhile for debt, FPI flows to Chinese bonds rose
to its highest level in one year by 10% QoQ to $9.1 billion. Aside benefiting
from the negative yielding bonds across the globe amid monetary easing in many
countries, the People's Bank of China rolled out slew of measures aimed at
opening its financial sector. This includes scrapping investment limit for the
qualified foreign investor program (widely known as QFII and RQFII channel) and
opening the onshore derivatives market to meet the need of overseas investors
to hedge against foreign exchange risks. Elsewhere in India, foreign portfolio
investors pulled out $1.9 billion in Indian investments.
The downturn in FPI flows
to India mirrors slowdown in economic growth (-50bps YoY to 4.5% in Q3 19)
which dampened prospect for corporate profitability.
Elsewhere in Latin
America, foreign portfolio flows to Mexico rebounded in Q3 19 to $1.77 billion
(vs net outflow of $975 million in Q2 19). Specifically, while Mexico's
lackluster macroeconomic performance over the last three quarters continue to
dampen investors' appetite for private sector shares and money market, FPI
flows to foreign currency securities more than compensated. Over Q3 19,
Mexico's foreign currency denominated debt rose to $5.3 billion. While this
provides a cause for cheer, we think a large chunk of these flows were
investments in the $7.5 billion Eurobond issued by the state-owned oil &
gas firm (PEMEX). Elsewhere in Argentina, the outflow lingered for the sixth
consecutive quarter in Q3 19 (Net outflow: $1.8 billion). This mirrors the
tapestry of macroeconomic woes which includes; weakening peso, inflationary
pressures (51.4% as at November 2019), receding economic growth (-17% YoY in Q3
19) and a looming debt crisis (External debt: $276.7 billion in Q3 19).
Over to EM Europe, for the
sixth consecutive quarter, portfolio flows into Poland sustained its negative
run in Q3 19 (Net outflow: 4.1billion Euros). While the persisting exit of
foreign investors is in part fed by slowing economic growth concerns due to its
crawling industrial output, fears of a possible fallout with the EU over its
judicial reform proposals continues to wary foreign investors. Elsewhere,
following its sturdy economic growth-Russian economic growth accelerated to
1.7% in the third quarter, the fastest pace this year- portfolio flows
continued its positive run in Q3 19 ($1.2 billion).
Happy days ahead for EM foreign portfolio flows
In charting the course for
portfolio flows to emerging market in 2020, we think developments around
heightening trade protectionism, the direction of monetary policy across
developed markets and prospects for commodity prices (especially crude oil)
would play a dominant role. On trade, the US and China finally agreed to the
phase one deal which provides temporary pause in the trade war. However,
possibilities of a flare up over the phase two agreement and tariff hike by the
US on importation of goods from Europe could spell doom for global growth and
investments. This is further exacerbated by our expectation for lower crude oil
prices (ARM forecast: $61.26/bl) in 2020 which does not bode well for the
fiscal conditions of most crude oil exporters. Notwithstanding, the dovish
monetary policy stance across most developed markets could serve as a push
factor for portfolio flows into emerging markets this year. This in addition to
International Monetary Fund's forecast for emerging market growth to accelerate
in 2020 and remain more than double that of developed markets makes valuations
for EM relatively attractive. Hence, we see scope for higher portfolio flows
into EMs in 2020.
On a regional basis, in EM Asia, while China's economy is expected to
weaken on the back of lingering uncertainty trailing the second phase of the
US-China trade deal as well as tighter financial conditions, portfolio flows to
China should remain above par. This is premised on introduction of reforms and
initiatives by the government to increase foreign investors access to its
financial market1. Away in India, we see scope for softer portfolio flows over
the first half of 2020. Our view is premised on the Reserve Bank of India's quest
to pursue accommodative monetary policy in a bid to spur economic growth which
does not bode well for bond prices. This in addition to high levels of bad debt
in the banking sector should taper appetite for India's risky asset in 2020.
Meanwhile in Lain America,
we are slightly positive on foreign investors inflow into Mexico in 2020. Our
optimism is hinged on projected pickup in economic growth due to firmer
domestic demand, particularly on a rebound in public spending and business investment.
Nevertheless, we highlight concerns over its heavily-indebted state-owned Oil
& Gas firm -Pemex, policy uncertainty which continues to dampen investor
confidence and threats of U.S. tariffs as possible risks to our expectation
during the period. Over in Argentina, we see no respite for portfolio flows as
Argentina's economy shows no sign of recovery. The country is still laced with
sky-high inflation rate, looming debt crisis and uncertainty regarding economic
policies and reforms. Meanwhile in EM Europe, fears of a possible fallout with
the EU over its judicial reform proposals could continue to keep foreign
investors flow into Poland subdued over 2020.
Related News from ARM's H1 2020 Nigeria Strategy Report
Related News from ARM's H2 2019 Nigeria Strategy Report
Related News from ARM's H1 2019 Nigeria Strategy Report
1. NSR H1 2019 (9) - Fixed Income
- Will Yields Hump or Shift?
2. NSR H1 2019 (8) - Nigerian
Fiscal - More Strain On FG Finances
3. NSR H1 2019 (7) - Monetary
Policy - Maintaining The Narrative
4. NSR H1 2019 (6) - Nigerian
Inflation - Boiling Below The Surface
5. NSR H1 2019 (5) - Currency - A
Test Of Nerves And Resilience
6. NSR H1 2019 (4) - Domestic
Economy - Stable Growth In Dire Need Of Fresh Impetus
7. NSR H1 2019 (3) - Crude Oil -
Not Great But Not All Gloom Either
8. NSR H1 2019 (2) - MEA Region: A
Year of Fragile Growth
9. NSR H1 2019 (1) - Global
Growth: New Year, Same Rhetoric, Matching Growth
Related News
1.
Fitch
Revises IHS's Outlook to Negative; Affirms at 'B plus'
2.
Fitch Revises Outlook
on UBA Subsidiaries to Negative on Parent Action
3.
Top Priorities for
the African Continent 2020-2030
4.
Global Growth: Modest
Pickup to 2.5% in 2020 amid Mounting Debt and Slowing Productivity Growth
5.
Economic Associate's
Conference on 'Nigeria's Economic Outlook' To Hold On Feb 19, 2020
6.
Meristem Research
2020 Outlook - Finding Alpha Amidst The Haze
7.
Nigeria in 2020:
Awakening the Sleeping Giant
8.
Nigeria's Economy in
2020; Understanding The Past, Preparing For The Future
9.
Nigeria Economic
Outlook 2020: A Different Playing Field
10. Is a Negative Fitch
Outlook a Kiss of Death?
11.
Fitch Revises Outlook
on 4 Nigerian Banks to Negative on Sovereign Action
13. Fitch Affirms Benin
at ''B''; Outlook Positive
14. High Indebtedness,
Low Growth Shapes 2020 Global Credit Outlook
15. Fitch Revises Outlook
on Nigeria to Negative; Affirms at 'B plus'
16. Liquidity Still The
Key Factor in Nigeria's Economic Stability in 2020 - Dr Ayo Teriba
17.
Nigeria FY 2020
Outlook - A Delicate Sprout
18. Service Sector
Resilience to Help Global Growth Stabilise in 2020
19. 2020 Outlook: At the
Cliff's Edge - Macroeconomic Review and Outlook
20. Moody's Affirms
Interswitch's Ratings; Outlook Remains Stable
21. Moody's Affirms Bank
of Industry Ratings, Changes Outlook to Negative from Stable
22. Moody's Affirms
Ratings of Nigerian Banks Following Action On The Nigerian Government
Research 234 (1) 2701653 research@armsecurities.com.ng
Related News from ARM's H2 2018 Nigeria
Strategy Report
1. NSR H2 2018 (15) - Equities:
The Divergence… Fundamentals or Sentiment?
2. NSR H2 2018 (14) - Fixed Income: Have Yields hit the bottom?
3. NSR H2 2018 (13) - Monetary Policy: A Classic Catch-22, Where will the
Balance Tilt?
4. NSR H2 2018 (12)- Nigerian Inflation: Approaching an Inflection Point
5. NSR H2 2018 (11)- Currency: The Battle for Naira Stability
6. NSR H2 2018 (10)- Balance of Payment: CA Surplus Recycled Through Record
Portfolio Outflows
7. NSR H2 2018 (9)- Growth to Run Above 2%, But Nearing a Cyclical Peak
8. NSR H2 2018 (8) - Game Of
Thrones! How They Stack Up In the Race
9. NSR H2 2018 (7) - Pension: Multi-fund - Will Variable Assets Blow-Up or
Blow Over?
10. NSR H2 2018 (6) - Nigerian
Fiscal: Deja Vu All Over Again?
11. NSR H2 2018 (5) -EM Portfolio
Flows: Slowing the Flow, But Far From A Dribble
12. NSR H2 2018 (4) - Commodity
Prices: Peaks and Troughs Across Soft Commodities
13. NSR H2 2018 (3) - Crude
Oil: Stability Gains Ground in Titans' Tug of War
14. NSR H2 2018 (2) - A Tale of
Resolve and Recovery Across MEA
15. NSR H2 2018 (1) - Supportive
Global Monetary Policy to Consolidate Global Growth Over 2018