Investors regained some appetite for riskier assets in November, with both emerging market stocks and currencies eyeing their best month since January amid hopes the US and China would call truce on their ongoing trade dispute and reduce the downside risk to global growth.
The MSCI Emerging Market stock index is poised to end the month 4.1 per cent higher despite slipping 0.4 per cent on Friday.
Likewise, the benchmark JPMorgan emerging markets currency index is on track for a 1.6 per cent monthly gain.
EM assets have had a rough run since the start of the year as rising US interest rates and a resurgent dollar sapped demand for the asset class. President Donald Trump’s trade war against China, which has cast a pall over the outlook for the global economy, has also fuelled fears of weaker demand for the commodities that make up the backbone for many developing countries.
Meanwhile, country specific issues in Turkey, Argentina, South Africa and Russia, have added to the unease, with a sharp currency sell-off in those countries earlier this summer prompting some investors to question whether a more severe pullback could be in store.
But November has seen a slight recovery in sentiment ahead of a pivotal meeting on the sidelines of the G20 summit between the US and China that could help break the impasse between the two countries on trade.
Assets also received a boost after Federal Reserve chair Jay Powell said this week he believed US interest rates were “just below” neutral, a level regarded by economists as neither helping nor hindering economic growth. The comments, which were seen by markets as dovish has raised expectations that the US central bank may slow its pace of interest-rate hikes next year and, by extension, the advance of the dollar.
Still underscoring investors’ jitters, the MSCI EM index remains down 14 per cent for the year while the JPMorgan EM currency index is still nursing a 10 per cent decline.
Per Hammarlund, chief EM strategist at SEB, the leading Nordic corporate bank, says that ‘trade, Trump and treasuries’ will be the major factors affecting emerging markets over the next three to nine months:
“When it comes to trade, or expansion of the world economy, conditions have deteriorated in 2018, pointing to a slowdown in growth, albeit from a high level. Politics will be challenging and have a dampening effect on investor sentiment towards emerging markets (EM). Lastly, treasuries will raise interest rates, driven partly by the US Fed and partly by local factors.”