A softer dollar, stable oil prices and lower U.S. treasury yields will take the pressure off emerging markets that have large U.S.-dollar denominated debt, says Eric Robertson, head of global macro strategy and FX research at Standard Chartered bank.
Robertson is “cautiously optimistic” about the future of emerging markets because he says external factors are stabilizing.
With India, Indonesia and Thailand heading for elections next year, there is political risk but external factors should mitigate that, says Robertson.
Emerging markets this year have been plagued by escalating trade tensions, a strong U.S. dollar, unstable oil prices, and rising interest rates. But all that may change soon, according to Eric Robertson, head of global macro strategy and FX research at Standard Chartered bank.
“The external vulnerabilities that have plagued emerging markets this year, like the higher U.S. rates and the Fed, and higher oil prices … we think a lot of those have stabilized,” Robertson told CNBC on Friday. “The trade backdrop is still difficult and the risks around U.S. and China are still in play, but we are cautiously optimistic.”
Robertson expects the dollar to soften and long-term U.S. treasury yields to move lower next year, taking the pressure off countries with current account deficits. “I think that’s an important factor for investors to consider,” he said.
While there won’t be a broad-based emerging market recovery, Robertson sees good opportunities in selective markets. He expects the churn and volatility in the currency markets to stabilize as the dollar gets softer next year.
“Our view is that the dollar is in the process of topping,” he said.
Remarks by U.S. Federal Reserve Chairman Jerome Powell on Thursday indicated the Fed may be looking to pause raising rates this year, and as a result, emerging market currencies hit their highest level in four months. The MSCI Emerging Markets Index hit a 3-week high after Powell’s comments.
Politics and volatility
Robertson’s predictions bear well for emerging markets in Asia such as India, Indonesia and Thailand, which may face political upheaval as they head for general elections next year.
India, a major oil importer, has suffered economic setbacks this year with an extremely weak Indian rupee and significant trade shocks.
“A stable or softer dollar, and stable or lower oil prices, will be a significant net positive for India as it takes the pressure off RBI (Reserve Bank of India) to continue to hike rates. We think that gets deferred to next year,” said Robertson. “No one wants to see political uncertainty or upheaval in India … but external factors should help mitigate that.”
While emerging markets such as Turkey, Brazil and Pakistan have their own internal political problems, the U.S.-China trade dispute has added pressure to supply chain woes for countries like Malaysia.
Malaysia faces external trade concerns and weak exports, and China is one of its largest trading partners.
“There are some concerns about fiscal sustainability (in Malaysia),” said Robertson. “But in an environment where the external factors are stable, or neutral, or maybe slightly better, I think rating agencies will give the new administration the benefit of the doubt.”
If trade tensions continue, regardless of what is achieved at the G-20 summit, the equity markets in North Asia, such as Korea and Taiwan, will underperform, said Robertson. But for countries such as India and Indonesia, his theme is “overweight.”