Monthly: Conditions for an improved EM outlook

Easing DXY and USD funding, stable energy prices, signs of a trade war détente, fading of a hard Brexit scenario, and hints of a bottom in the global electronics cycle have improved EM outlook.
Taimur Baig, Ma Tieying25 Oct 2019
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Photo credit: AFP Photo

What would it take for emerging markets to turn around in 2020?

Investors are looking somewhat at ease going into the final stretch of 2019. In the recently concluded IMF annual meetings in Washington DC, the sentiment was subdued and yet unalarmed. Having experienced an extended period of downshift in inflation, interest rates, trade, and growth this year, markets and economies are resigned to a low normal, with noise from trade war, Brexit, and stress in emerging markets adding noise time to time. Asset markets were not seen as frothy, although corporate debt levels were deemed too high. There was low expectation of vigorous monetary or fiscal action from major economies next year, and much of the ongoing slowdown was seen as the result of a combination of unavoidable late cycle dynamics and various structural factors.

At the same time, easing DXY and USD funding conditions, stable energy prices, signs of a trade war détente, fading of a hard Brexit scenario, and hints of a bottom in the global electronics cycle have the making of an improved outlook for emerging markets going into 2020. While geopolitical risks remain high and asset market valuations are frothy, sentiments are turning more favourable toward economies reliant on external funding to finance current account deficits. We examine the conditions necessary to keep the trend going.


The conventional wisdom is that with US Presidential elections just a year away, and with US economic growth likely to fall below 2%, President Trump’s interest in a trade war détente has risen considerably. The “first round” of trade deal may well mark the short-term bottom of trade friction.

We are seeing signs of a trade trough in the bellwether economies of Asia. As per data available through September, exports growth of China, South Korea, and Taiwan are now in turnaround territory.

Liquidity, DXY, commodities, and rates

Also, financial conditions have become comfortable lately, thanks to central bank policy easing and reinforced liquidity measures. At the same time, the dollar strength has ebbed a tad, while commodities (both price level and volatility) have been tame. Risk aversion has weakened, while rates and spreads have turned favourable. Under these circumstances, emerging markets economies have caught a welcome breather, enjoying inflows and financial market stability.

Going into 2020, most of these trends would need to persist for emerging markets to perform healthily. China’s gradual slowdown and geopolitical uncertainties are two large drags to global demand; funding conditions, rates, USD, and long-term rates need to counter that challenge.

Taimur Baig

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Taimur Baig, Ph.D.

Chief Economist - G3 & Asia

Ma Tieying

Economist - Japan, South Korea, & Taiwan

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