Latest Emerging Markets (Unconstrained) economic and market outlook.
In the US, House and Senate Republicans reconciled differences on the tax reform plan and approved a new version in late December, handing President Trump his first major legislative achievement. Tax cuts for corporations and individuals should provide a modest lift to consumer spending and business investment in 2018. This fiscal boost will come at a time when growth momentum is already robust, with the economy operating at full employment and above long-term potential. However, with inflation still below target, we continue to expect the Fed to maintain its gradual pace of monetary tightening in 2018.
Economic momentum in China appears to be losing some steam as we head into 2018, with investment growth and industrial production both weakening recently. Some of the weakness may be due to special factors such as the conclusion of the latest Party Congress. However, the Chinese economy’s slow-but-steady deceleration will likely continue in 2018 amid reforms aimed at curbing the negative externalities of past expansion. Such measures include a stricter environmental policy and tighter regulation in the property market to contain financial risks, both of which will likely exert downward pressure on growth this year.
Overall, we expect the ‘Goldilocks’ scenario of accelerating global growth and relatively easy monetary policy to continue into 2018. Stronger economic growth, faster global trade, and modest rate tightening without meaningful dollar appreciation all bode well for EM equities. Moreover, the relative valuation of EM equities versus their Developed Market counterparts remains close to its widest point in a decade. Indeed, while EM significantly outperformed DM in 2017, this was long overdue and the cumulative underperformance from 2010-2015 has barely begun to narrow. We are therefore optimistic of further gains for EM equities in 2018.
More specifically, we remain particularly bullish on Argentina, where the pro-market government recently passed a pension reform that should help to rein in the country’s bulging fiscal deficit.
Meanwhile in Asia, we continue to be constructive on Vietnam. Its virtues of a young and highly skilled population and its proximity to China mean it offers many structural growth opportunities, both in terms of foreign investment and domestic consumption.
Finally, whilst we have been bullish on Russia for many months, we have recently started to reduce exposure there due to concerns that far stricter sanctions could be imposed if Mueller’s investigation uncovers evidence of Russian attempts to influence the US election.
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