While there are certain benefits when it comes to emerging market trading, investors had a tough year in 2018, with the deck seeming to be stacked against them, either as a result of the strong US dollar, or because of trade spats and the rising US interest rates. Strategists claim, however, that things could change in 2019 which is why keeping a close eye on live FX news is becoming increasingly important. OppenheimerFunds’ Alessio de Longis (portfolio manager) talked to MarketWatch and noted that the belief is that emerging market assets will outperform the United States across the board in the first half of 2019. According to the portfolio manager, emerging market asset prices at the moment are reflecting under-owning.
About Emerging Market Economies and Benefits
The majority of trading is taking place among currencies of the largest economies, but emerging market economies and the currencies they have to offer are playing more and more of an important role when it comes to the international financial markets. Back in 2016, currencies that came from emerging market economies represented over 21% of daily trading.
In essence, emerging markets are developing countries where transitions are occurring in political, social, demographic and economic realms. In the emerging market countries the financial and the banking systems are generally still in the developmental stage, and the middle-class population of those countries might be small or in some cases non existent. This can result in greater volatility in the financial dimension and also larger swings between economic decline and economic prosperity.
Due to the fact that emerging market countries are still in that developmental stage (economically and/or politically), there are also certain special risks which come with investing in them. Political risk is a big concern, as emerging markets tend to have a greater uncertainty in the political side of things compared to more developed economies. Sudden changes in the political dimension could result in unexpected movements and could generate great losses. One unique feature that emerging markets posses is the structure that their currencies have. While most large economies have independent currencies which are allowed to float freely, many of the emerging market are not allowing their currencies that.
What could happen in 2019?
When it comes to the New Year, global growth is promising to be the central theme which for 2018 was trade-war issues. Both market participants as well as central bankers have stated their concerns in regards to the slowing of the global economic growth in recent months. James Swanston, assistant economist at Capital Economics wrote that with the US and Chinese economies being set to slow down in 2019, softer global demand could weigh on emerging markets growth.
The summer of 2018 was not beneficial for emerging markets, as both Turkey and Argentina saw their currencies being trapped in a downward spiral, with investors worrying about the rising interests in the United States, the strong dollar, and the effects that those factors would have on the developing nations that have large dollar-denominated debts.
Columbia’s peso ended up being a safe choice, as it was one of the few currencies which avoided the summer downturn, and this could be the case again in 2019, as Columbia’s peso might be a favorite again in 2019 according to market participants.
In Brazil, the political uncertainty eased to a certain degree, but after the presidential election which took place last autumn investors are currently waiting to see if this new administration can achieve the reforms which are much-needed. Tim Atwill, Parametric Portfolio Associates’ head of investment strategy noted that in Latin America and even outside of Brazil can be found goof valuations. He notes that the US market is close by and this geographic distance can make a difference.
One big factor for 2019 could be the Federal Reserve, as it has been on the forefront when it comes to developed market central banks when it comes to raising interest rates. Analysts note that the Federal Reserve is moving closer towards ending the rate-normalization cycle. The US interest rates were raised for a fourth time this year, but the Fed lowered its expectation for new year rate increases to 2 from 3, which in theory should alleviate some emerging-market headaches that are anticipated and which derive from a stronger dollar.