Trade war truce gives Emerging Markets a “stay of execution”

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Emerging markets held a relief rally in the wake of the much-anticipated meeting between President Trump and Chinese President Xi Jinping at the G20 meeting in Buenos Aires. By agreeing to a 90-day truce in their ongoing trade war, the two leaders gave Emerging markets (EM) investors the best they could realistically hope for.

Eaton Vance, a global investment manager, notes: “With Trump and Xi effectively declaring a truce in their trade war, the EM sector has been given some breathing room. We expect that the market will reward countries that use this reprieve – however long it lasts – to shore up their fundamentals.”

The sector has sold off sharply over the course of the year, riled by the U.S. Federal Reserve’s interest-rate hikes, the strength of the U.S. dollar, shaky fundamentals in many EM countries and slowing growth in China. The growing trade war added to the worries about the Chinese economy.

Given the stay of execution from Trump and Xi, EM investors shrugged off those concerns, at least temporarily.

Eaton Vance says: We expect the boost to be short-lived:

  • Tensions between the U.S. and China have not dissipated. Negotiators have 90 days to agree to “structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture.” This is a tall order for two countries with so little trust between them.
  • Existing challenges with Fed normalization are still with us. Fed Chairman Jerome Powell’s softer tone has also been welcomed by the markets, but the Fed’s “data-dependent” approach is likely to still lead to further rate hikes in 2019 as it searches for what it considers a “neutral” level.
  • Fundamentals within EM still have room for improvement. EM issuers like Turkey, Argentina, Sri Lanka, Zambia and Lebanon all have displayed weakness this year. China’s slowdown casts a shadow on many EM issuers who are trade-dependent on the country.

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