Emerging markets have been buoyed by hints from Federal Reserve officials that they might slow the tempo of interest-rate increases if the United States’ economic growth continues to decelerate.
Rate hikes from the Fed were largely blamed for the poor performance of emerging-market assets through the first three quarters of 2018. However, recent comments by Fed Chairman Jerome Powell have added to expectations the US central bank may adopt a more cautious outlook.
Powell told the American Economic Association that the Fed is not on a pre-set path of rate hikes and that it would be sensitive to the downside risks that markets are pricing in.
After emerging-market stocks led global equity markets lower in a brutal 2018, analysts are betting that emerging-market asset class may have the largest rebound in the new year with Nigeria expected to miss out due to higher volatility.
“The Federal Reserve is reevaluating their provision. They want to slow down tightening in order to give the market some breathing space and allow some economic fundamental to mature,” Nnamdi Olisaeloka, fixed-income broker at Zedcrest Capital Limited, said.
Olisaeloka explained that if that happened, some portfolio managers would begin to look at their undervalue assets in emerging markets some of which might be priced below what seems to be their fair value.
“It’s not all emerging markets they would be looking at. They would be more selective this year, especially countries that have strong reserves or good macroeconomic fundamentals, and might not consider countries with volatile issues like Nigeria,” he said.
Omotola Abimbola, research analyst at Ecobank, said there is a possibility emerging markets (excluding China) would possibly outperform developed markets in 2019.
“Valuations are looking quite cheap compared to last year or two years ago,” Abimbola told BusinessDay.
He, however, noted that 2019 would be a very tough year for emerging markets despite the news of pausing US rate hikes. There are other factors like uncertainties regarding trade tension between US and China, expected growth that might probably moderate within as business cycle matures.
“For Nigeria, valuations are looking very cheap in the market, PE ratio at record low, while dividend yields are close to a record high. It will still be a very weak volatile year due to investor sentiment,” Abimbola said.
The dollar outperformed other currencies in 2018 on the back of the Fed being the only major central bank hiking rates. If it stays on hold in 2019, other currencies such as the euro might benefit.
The MSCI Emerging Markets Currency Index rose to its highest level since July on Monday, having risen in eight of the past 10 weeks. The Brazilian real, South African rand and Russian ruble are leading the gains so far this year, with all three currencies appreciating at least 3 percent against the dollar.
However, emerging market currencies on Tuesday fell as the dollar saw a modest rebound, while scepticism about US-China trade talks weighed on developing world stocks.
“Talks with China are going very well!”President Donald Trump tweeted on Tuesday.
Goldman Sachs Asset Management, one of the world’s leading investment managers, says it expects to see improved economic conditions in emerging markets in 2019, thus providing a springboard for the value of regional stocks and currencies.
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