Emerging markets credit: China’s response to deceleration to shape growth prospects in 2019

09/11/2018

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Steve Drew, Head of Emerging Markets Credit, sees politics as a driver of risk sentiment in 2019 although at an economic level China’s policy response to deceleration and trade disputes will shape growth prospects.

 
What are the key themes likely to shape markets in 2019?
 
Political risks are likely to be the key drivers of risk sentiment in 2019. We believe that we are entering into a further year of expansion, driven by buoyant US growth, aided by fiscal measures and pro-US policies, alongside sluggish European growth, a slowing China with debt concerns and a mixed outlook for emerging markets. US dollar strength is likely to be a continuing concern for global markets coupled with the path for US interest rates. We expect oil and commodity prices to again be drivers of risks and returns in 2019. Heightened but dynamic geopolitical risks in the Middle East, Turkey and Russia should help shape this volatility. Elections across the emerging world will continue to be catalysts for change. 2018 has seen a dramatic shift to both the extremes of left and right policy, away from the moderate centre. We believe that these political changes, along with the rise in populism, will continue to drive sentiment and volatility for investments.

Where do you see the most important opportunities and risks within your asset class?
 
Emerging markets will experience a balance of risks and opportunities in 2019. Each of the risks will likely see a policy response and be self-regulating. We see broader risks in Latin America, particularly Brazil, which will be adjusting to its first right-wing government since the 1980s. Optimism is high for pro-market reforms and a reduction in corruption. Mexico has also seen a regime shift, this time to the left with the election of Andrés Manuel López Obrador (AMLO). Predictability of policy in Mexico will be a key risk going forward. Turkey is mired in a vicious cycle of rising foreign currency debt, rampant inflation and a current account deficit. Turkey is no longer in control of its destiny. The wall of bank debt that needs to be refinanced in 2019 will likely result in a further shrinking of the Turkish economy. China is slowing; however, the levers that can still be used to decelerate this slowdown will be the key policies for growth, not just in China, but on a global scale. The interaction of the US and China in terms of trade and foreign policy will hold both risk and opportunity in 2019.

How have your experiences in 2018 shifted your approach or outlook for 2019? 
 
2018 has been a year dominated by many risk cross-currents that have generated political, geopolitical and multi-asset volatility. 2019 is also likely to be a non-trending year, with a continued balance of market risks and opportunities. Macro volatility will likely have different drivers in 2019, however, as the US Federal Reserve (Fed) comes toward the end of its rate-hiking phase and as we move into a quieter phase for the global election cycle. 2019 may well be similar to 2018 with respect to the heightened intermittent volatility caused by a further reduction in the size of the Fed’s balance sheet and global liquidity. As we head into what we believe will be another expansionary year for global growth we will remind ourselves that outperformance can also come from preservation of capital as well as alpha-driven opportunities.

 

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

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Janus Henderson Horizon Emerging Market Corporate Bond Fund

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