Repost: While the Fed Fumbles, Look at Emerging Markets

Here’s the latest global economic update from LOM Financial:



Despite market turbulence, the Fed decided to go ahead with the fourth rate hike of the year, while reducing expectations for next year to two hikes. All risky assets prices declined after the rate decision, as investors fear that higher interest rate will be a burden to economic growth. As the Fed contemplates its new reality and U.S. markets struggle to regain balance, we think Emerging Markets are worth a look at these levels.


It seems fitting that 2018 was the year of the Dog in the Chinese Zodiac. Most asset classes fared poorly this year as investors hit the panic button, but the pain has been particularly acute in the emerging market (EM) sector. Notwithstanding a few weeks of recent relative outperformance, EM’s as a whole have dramatically underperformed the broader averages this year. For example, while the S&P 500 stock index has declined by 8% year-to-date, the MSCI emerging market stock index is down 15.6%, representing underperformance of 7.6% as of this writing.


To a large extent, 2018 has been a perfect storm against the EM’s. The strengthening greenback, rising trade war tensions, geopolitical upheaval and collapsing oil prices have been major headwinds. China, by far the largest of the EM countries, has lately been the whipping boy of American politicians and the clear target of Trump’s aggressive trade negotiations. Looming uncertainties over trade policies and growth have curtailed business investment creating poor sentiment for investors. Also, China and the other EM’s are experiencing slower rates of GDP growth than they have enjoyed in the past.


Despite modestly decelerating growth in the world’s second largest economy, economists expect China’s gross domestic product (GDP) to advance at a rate of about 6.6% in 2018 and 6.2% in 2019, more than double the rate expected for the developed world as a whole using Bloomberg consensus data. Next year, aggregate emerging market GDP is expected to advance at a rate of 4.7%, compared to 2.1% for developed countries, as forecasted by the International Monetary Fund (IMF).



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