Globally, we are positive on emerging economies and more particularly on the Frontier markets. Despite the anti-globalisation rhetoric from the new U.S. President, we do not believe in a Global Trade War scenario and few factors will support investment in Emerging and Frontier Economies:
- A low-interest rate environment will push investors to look for different sources of revenue;
- A U.S. budget policy expansion and a limited FED’s action will weight on the dollar value;
- A stabilisation of the global commodity prices will re-enforce the exporter’s economies, and it will not destabilise the importer’s economies;
- An increase in the global risk will play for more diversification, and it will be positive for asset classes globally under-weighted.
View by region
Asia-Pacific: the primary driver of the growth remains China. Indeed, China still is carrying potential systematic risks, including the property market slowdown, regulatory framework for shadow banking or a massive corporate debt. However, these threats, completely vanished from market radars, will continue to be ignored in 2017. Asian frontier markets will continue to outperform the rest of the world, particularly Vietnam, Myanmar, the Philippines among others. Challenges in India are set to continue with the impact of the recent demonetization of 86% of currency and six elections coming.
Latin America: South American economies who have pushed major reforms towards liberalisation will attract stronger private investment and benefit from the stabilisation in commodity prices. In this context, inflation is set to decelerate over the coming quarters supported by exchange rate stabilisation, and recovering food production following weather-related shocks in 2016. Stable commodity prices should also support fiscal revenues, although prices will not allow the governments to balance their budgets in some of these economies. External unbalances will, therefore, continue to raise, which could affect investor sentiment where other fundamentals are less healthy.
Central America: Central America’s positive outlook from 2016 will continue, supported by a satisfactory performance in the US economy. The main downside risks relate to a renegotiation of the NAFTA agreement by Trump’s administration or a significant change in the US migration policy, which would lead to a massive return of convicts and criminals to the region. However, we believe this will not happen in the coming months, as the new US President will concentrate its policy making in Mexico which case resonates stronger in the US public opinion and media.
Central Asia and Caucasus: the increased influence of Russia in the region will continue which should overall benefit the countries in the area. Stable or slightly increasing oil prices will contribute to macroeconomic stability overall.
Middle-East: after the difficult year 2016, the region should coming back strongly. Opening markets in Iran and Saudi will bring leverage to growth in all the area. Even Egypt will beneficiate from the situation. After the free-float exchange rate, IMF funding, the country has an opportunity to come back to those very high growth levels that it used to have between 2003 and 2008. We are not so positive in North-Africa. In Marocco, Banks are still dragging their feet in terms of lending, and economic activity is subdued. In Tunisia, there are major difficulties in reducing unemployment.
Sub-Saharan Africa: Sub-Saharan Africa will see macroeconomic challenges beginning to ease in 2017, benefitting from the stabilisation in commodity prices. However, political and social unrest will remain a key issue which will weigh on investor sentiment. Recent currency devaluation, elevated inflation, and weak labour market dynamics have depressed consumer purchasing power. Also, 2017 could also see a cut in aid flows (Trump administration) to the region, while Europe is unlikely to increase their support.
Eastern Europe: the area will experience a rebound in investment in 2017. Few drivers will lead this trend: a greater absorption of EU development funds, a robust private consumption, and a more accommodative economic policy will support growth. The potentially adverse effects of a hard Brexit and demand from the Euro area pose the main downside risks to growth. Price pressures are expected to increase next year, and a contained inflation will gradually return in the region as the effect of low oil prices fades.
A high level of uncertainties
Indeed, the low level of low predictability of the new U.S. President and the miss of clarity in term of political agenda are clouded the big picture. Donald Trump formally withdrawing the U.S. from the Trans-Pacific Partnership and is threatening the NAFTA agreement. For now, we suspect that he will not do enough damage to completely undermine global growth prospects, but the risks appear to be rising and this would change dramatically our current view on Frontier markets.
A second risk out of the market radar, which potentially could change our view, is a normalisation between Iran and Saudi Arabia. Such event would stabilise the region but likely could lead to a jump in energy prices which will support producer countries against country’s importer as India.