EUR 4.00 For Business Accounts Only

NSR H1 2020 Excerpts - EM Portfolio Flows - Happy days ahead for EM foreign portfolio flows

• After strong performance (+10.6%) in the first half of the year, emerging markets equities had a difficult third quarter (-5.1%) and rallied in the fourth quarter (+11.4%). The third quarter slump was largely driven by heightening trade tension between US and China over the period. Specifically, United States levied an additional 10% tariff on US$300 billion worth of Chinese imports, labelled China a currency manipulator, and threatened to de-list Chinese companies from American exchanges. However, following reconciliatory talks that saw US reduced existing tariffs on Chinese goods and cancelled additional planned tariffs as part of a prospective Phase 1 trade deal, EM equities rallied in Q4 (+11.4%). In the fixed income side of things, Emerging markets government bond spreads tightened more than 28bps and 83bps in Q3 19 and Q4 19 respectively over comparable U.S securities. This largely reflects investors’ appetite for riskier assets in the wake of accommodative monetary policy across most developed markets.
• In charting the course for portfolio flows to emerging market in 2020, we think developments around heightening trade protectionism, the direction of monetary policy across developed markets and prospects for commodity prices (especially crude oil) would play a dominant role. On trade, the US and China finally agreed to the phase one deal which provides temporary pause in the trade war. However, possibilities of a flare up over the phase two agreement and tariff hike by the US on importation of goods from Europe could spell doom for global growth and investments. This is further exacerbated by our expectation for lower crude oil prices (ARM forecast: $61.26/bl) in 2020 which does not bode well for the fiscal conditions of most crude oil exporters. Notwithstanding, the dovish monetary policy stance across most developed markets could serve as a push factor for portfolio flows into emerging markets this year. This in addition to International Monetary Fund’s forecast for emerging market growth to accelerate in 2020 and remain more than double that of developed markets makes valuations for EM relatively attractive. Hence, we see scope for higher portfolio flows into EMs in 2020.