Consumption disruption in 2019?
The U.S. consumer has been a significant contributor to domestic economic growth in 2018. Will consumer consumption be hit by inflation in 2019?
After multiple headwinds over the past year, emerging markets have a brighter, albeit challenging, forecast in 2019. Slowed U.S. Fed policy could ease pressures on local central banks, leading to a more supportive theme, but geopolitical issues and the trade war remain major threats to emerging markets growth.
Emerging markets faced multiple headwinds this year, namely a strong dollar, China’s focus on deleveraging and regulations, trade wars, volatile energy prices and increased geopolitical risks. By comparison, U.S. returns benefitted from a more attractive growth rate, which was the result of tax reform, lower regulatory pressures and repatriation of overseas earnings.
The U.S.-China trade tumult remains a front-and-center issue for many emerging market economies. Any resolution to the issue would be critical not just for China, but its other Asian trading counterparts like South Korea and Taiwan. As such, we are cautiously optimistic for the status quo on the trade war and no further escalations. We believe China has started loosening policy on the domestic front and we anticipate an easing of policy on regulations, monetary and fiscal side of things, which should be supportive of the domestic economy. We already see early measures that are supportive of the private sector, personal consumption and infrastructure spending and we think more measures are on the way.
Source: Ivy Investment Management Company; selected emerging market countries.
Brazil is still in the early stages of a recovery from a record setting recession. Inflation is very much under control, which should allow Brazil’s central bank to keep rates lower in the near term. The president-elect, Jair Bolsonaro, takes office on January 1, 2019, with leadership elections for the upper and lower legislative bodies following in early February. The new administration has high approval ratings heading into office, and we believe it needs to enact fiscal reforms while the honeymoon lasts. Privatizations of state-owned companies will provide a budgetary buffer, but safety net reforms, like pension and social security, will require heavy lifting.
India continues being relatively more immune to trade-related headwinds elsewhere in Asia. The fall in oil prices offers a respite to country’s fiscal pressures that built up earlier in the year and pressured the rupee.
We believe Mexico and South Africa will face geopolitical headwinds in 2019. Mexico’s incoming president, Andrés Manuel López Obrador, has already proposed a host of marketunfriendly measures like cancelling a construction project of the Mexico City New International Airport.
Ongoing political scandals in South Africa are impeding the economic reform efforts of President Cyril Ramaphosa. The country is scheduled to hold general elections in 2019, which could see the ruling African National Congress lose seats in the national assembly. Elections also may impact fiscal and monetary policies emerging markets in 2019, with India, Indonesia and Turkey among the more significant countries to watch.
Equity valuations are another supportive theme in the backdrop for emerging markets. While not at extreme discounts in both absolute and relative terms to developed markets, valuations are below median versus historical levels. Overall, emerging market equities were trading at about 10 times 2019 consensus earnings estimates as 2018 came to a close, or about a 27% discount to developed markets.
Amidst this backdrop, we believe the economic outlook for emerging markets, while challenging, still looks brighter. We expect a slower pace of Fed rate hikes and the slightly softer dollar to ease some of the pressure on emerging markets, giving local central banks a chance to ease rates or take a less aggressive stance on rate hikes. The recent agreement to cut oil production by the OPEC-plus group appears as a positive in the immediate term, but will take several months to see if the proposals actually take effect. We expect to see additional fiscal stimulus in China at some point in 2019, but the timing and magnitude should be dictated by ongoing negotiations between Beijing and Washington. The recent agreement to cut oil production by the OPEC-plus group appears as a positive in the immediate term but will take several months to see if the proposals actually take effect.
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The opinions expressed are those of Ivy Investment Management Company and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through December 2018, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.