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Central bankers, finance ministers and investors from around the world gathered in Washington, D.C. in April to discuss the global economy at the Spring Meetings of the International Monetary Fund (IMF) and World Bank. The outlook for Emerging Markets (EM) was a recurring theme and the overall mood was subdued, as investors weighed the current trade and geopolitical tensions.

1. Fixed Income Forecasts

EM fixed income had a good start to the year, but elections in Mexico, Brazil, Turkey, and midterms in the U.S. mean volatility will likely remain high. While rising U.S. and stgeloped market yields are highlighted as the key risk to markets, Fed hikes have been factored into investor expectations for the rest of 2018. Some 51% of investors surveyed by J.P. Morgan expect to see three Fed hikes in 2018, while 36% expect to see four (in line with J.P. Morgan’s forecast). Although EM fixed income inflows have been positive so far this year, having outpaced other fixed income asset classes, they are set to fall short of the record numbers seen last year.

EM Fixed Income Flows

2. Sanctions and the Oil Price

Investors that attended our conference generally believed that more sanctions on Russia and Venezuela are likely on the way. While Russian sanctions shouldn’t have much of an impact on sovereign debt, additional sanctions in Venezuela could support higher oil prices as production falls. Sanctions related to Syria and the use of chemical weapons are also very likely. Positioning data shows investors are still overweight Russian local markets, while J.P. Morgan has recently changed its view on Russia and the ruble to neutral. Investors agreed geopolitical factors and upward revisions to oil demand estimates from the EIA, IEA and OPEC mean there is a risk of rising oil prices in the short term.

3. Mexico and Brazil Elections

The outcome of elections in Mexico and Brazil is more of a risk than markets have fully priced in at the moment. While a huge majority (97%) of investors polled expect Andrés Manuel López Obrador (often referred to as AMLO) to win, speakers discussed the possibility of AMLO obtaining a majority in Congress which would grant left-wing party Morena enough room to control issues such as budget expenditure. Constitutional changes need a two-thirds majority and this still looks difficult. Meanwhile, the outlook for Brazilian elections remains very uncertain as no single combination of candidates for the second round was seen by the audience as having more than a 25% probability. This uncertainty around Brazil has encouraged investors to stay invested in Mexico and has boosted sentiment towards Argentina.

4. South Africa is a Top Pick

While South African policymakers did not present at the seminar, the country remains the top EM local markets recommendation from the J.P. Morgan EM Strategy team, who are staying overweight in South Africa rates. The region is still enjoying a cyclical growth recovery and the team’s view is that the South African Reserve Bank will hold rates for the rest of the year.

table 

What’s on the Horizon for Developed Markets?

For the U.S., only 6% of the audience saw a significant escalation in U.S.-China relations, but speakers were more concerned that trade tensions could extend to investment and technology transfer. The potential for surprises also remains high as any escalation in tensions potentially serves to benefit President Trump ahead of the U.S. midterm elections in November. Speaking of Trump, speakers believed that he will be the 2020 Republican presidential nominee. This is the view even if the Republicans lose the House to the Democrats in the midterm elections, which most speakers believed likely. In Europe, the outlook is benign when compared to last year. Official creditors have emphasized policy support will remain substantial and the region remains behind the U.S. in terms of recovery. However, sentiment towards Greece has hugely improved and the country appears to have generated goodwill within Europe and with official creditors.

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JP Morgan Asset Management

 

 

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