Unpacking the 2020 market drivers for emerging markets

The emerging markets space is set for an intriguing year in 2020, with a positive outlook from experts despite some challenges on the horizon. Michael Bolliger, Head Emerging Markets Asset Allocation at UBS Global Wealth Management, and John Ashbourne, Senior Emerging Markets Economist at Capital Economics, shared their insights on the market drivers and interest rate outlook for emerging markets during a recent CNBC Africa interview. The discussion touched on key themes such as global sentiment, growth differentials, sectoral opportunities, and potential risks facing emerging markets. UBS Global Wealth Management is adopting an optimistic stance on emerging markets, being bullish on equities, bonds, and currencies. Bolliger highlighted the positive impact of the phase one trade deal between the US and China on global sentiment. The growth differentials between emerging markets and developed markets are also expected to favor the emerging markets asset class. Bolliger pointed to bottom-up growth stories in countries like Brazil, Saudi Arabia, Russia, and South Africa, which are poised for higher growth in 2020 compared to 2019. Ashbourne echoed UBS's optimism on emerging markets, particularly in regions like Latin America and Russia, which had a challenging year in 2019. However, he expressed caution regarding China's growth trajectory, projecting a slowdown to around five percent in 2020. While the trade deal with the US appears positive, Ashbourne emphasized that China's growth might not meet expectations. When it comes to sectoral opportunities, Bolliger highlighted the tech sector's long-term growth potential. He emphasized the importance of patience and long-term investment strategies in tech companies, despite concerns about valuations. Additionally, the rising consumer spending in Asian countries like China presents new opportunities, especially in financial services and healthcare. In terms of growth prospects, Ashbourne identified smaller African economies as potential strong performers in 2020. While South Africa and Nigeria face challenges, countries like Ethiopia and Rwanda are expected to see robust growth rates. Despite South Africa's economic woes, the government's outlined reform agenda could potentially boost investor confidence in the country's assets. Both experts expressed contrasting views on South Africa's economic outlook. While UBS sees potential for positive developments, Capital Economics remains pessimistic due to ongoing challenges like power cuts and limited progress on structural reforms. The looming decision by Moody's on South Africa's credit rating remains a key concern for investors. Commodities, a crucial factor for emerging markets, are experiencing price increases. Bolliger highlighted opportunities in energy, PGMs, and gold due to geopolitical tensions and safe-haven demand. However, Ashbourne noted that Africa might not benefit significantly from higher oil prices and faces headwinds in this regard. Looking ahead, interest rate decisions by major global banks could impact emerging markets' direction in 2020. While the Fed's policy rates are expected to remain steady, other central banks' moves may vary, affecting different markets differently. Ashbourne emphasized that the supportive environment from central banks in 2019 might not continue this year, posing challenges for emerging markets. In conclusion, potential risks to realizing gains in the emerging markets space include geopolitical uncertainties, US-China trade tensions, and the upcoming US presidential election. The experts emphasized the importance of improved macroeconomic data and the resolution of key challenges like power cuts in South Africa for sustained growth. Despite differing perspectives on South Africa's prospects, both UBS and Capital Economics anticipate a dynamic and eventful year for emerging markets in 2020.