BackOutlook for emerging markets in 2020: 'It’s complicated,' writes Jim O’Neill
If Donald Trump decides to play nice, the Fed remains a benign influence, and China's growth stabilises, emerging-market equities could do rather well in 2020, says the former chairman of Goldman Sachs Asset Management and a former UK treasury minister
PremiumWill 2020 be a good year for emerging markets? Indian equities as measured by benchmark index Sensex is up 15% year to date. But broader markets, the midcaps and smallcaps, continue to have a bad year. The BSE midcap index, for example, is down 4% this year. Apart from domestic factors, the trend of Indian markets in 2020 will also depend on the overall fortune of emerging markets.
When it comes predicting the overall outlook for emerging markets in 2020, “it’s complicated," writes Jim O’Neill, former chairman of Goldman Sachs Asset Management and a former UK treasury minister, in a commentary posted on Project Syndicate.
The first reason: Donald Trump. Adding to that 2020 is an election year in US. "For starters, we are living in extraordinary times, owing to the unpredictable personality of the current American president. As the 2020 US presidential election approaches, Donald Trump’s behaviour is likely to become even more erratic than it already is," writes Mr O’Neill.
"One can only begin to imagine what steps Trump will take to improve his re-election chances. Will he engage in even more sabre rattling, threatening, say, additional tariffs against China or military action against Iran? Or will he focus on keeping financial conditions accommodative in order to ward off a slowdown or recession just before the election?" writes Mr O’Neill.
The months-long trade dispute between the US and China has roiled financial markets and has also hurt global growth.
A second complication for the 2020 emerging market outlook is the monetary policy stance of US Federal Reserve.
"What path is the US Federal Reserve likely to take, and what will it mean for the US dollar? These two related issues tend to have a disproportionate influence on developing and emerging markets, particularly those with a lot of dollar-denominated debt," writes Mr O’Neill.
"If the Fed continues easing its monetary policy as expected, and if the dollar stops rising, emerging markets will have less to worry about. But if the Fed is forced suddenly to start tightening—for example, if inflation finally picks up —developing and emerging markets would fare poorly, as would the rest of the global economy, given the cyclical weakness that has prevailed for most of 2019."
A third issue for emerging markets is China, according to Mr O’Neill.
In any case, he writes, the Chinese economy is facing a big complication. "In 2020, China’s real (inflation-adjusted) gross domestic product (GDP) growth will likely dip below 6% per year. This will be a major disappointment to all who have grown dependent on a growth rate closer to 7%, and it will be a marginal net drag for many others," he writes.
But "as long as Chinese consumers continue to contribute a growing share of overall GDP, pessimism about China’s prospects will be unwarranted", he adds.
Then is valuation. Mr O’Neill believes emerging-market equities are generally inexpensive and, by some measures, quite attractive—relative to equity and bond markets globally.
"If Trump decides to play nice, the Fed remains a benign influence, and China stabilizes its annual growth rate just below 6%, emerging-market equities could do rather well in 2020," he writes, adding that emerging-market countries have plenty of specific challenges of their own.
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