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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. During the meetings, J.P. Morgan hosted an investor seminar, attracting more than 700 attendees. Here’s a roundup of the highlights from the event. To learn more, head to J.P. Morgan Markets.
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 developed 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
$113
billion
2017
$19.7
billion
Year-to-date
$70-80
billion
Est. for 2018
Source: J.P. Morgan, May 2018
What will the pace of Fed interest rate hikes be in 2018 and 2019?
Source: J.P. Morgan
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.
Where do you see Brent crude oil prices at the end of 2018?
Source: J.P. Morgan
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.
What do you see as the main risk to markets in 2018?
Source: J.P. Morgan