An Investor’s Guide to Emerging-Market Risks in 2019

(Bloomberg) -- Emerging markets are tentatively picking themselves up off the floor after a rout that wiped about $5 trillion off the value of stocks since January. But the reprieve may not last long.

Rising rates in the U.S., a stronger dollar, Beijing and Washington’s trade war, lower oil prices and the emergence of populist presidents in Latin America’s two biggest economies could all weigh on markets.

“The theory is dead simple: emerging-market assets have already bombed, so the downside, if things get worse, is much lower and if things recover they have greater potential to perform,” said Anthony Peters, an independent analyst formerly at Blockex Ltd. in Chipping Norton, U.K. However, “they have the potential to go much lower for much longer than anybody had ever thought possible.”

The Fed and the Dollar

Investors will be carefully watching the U.S. Federal Reserve after Chairman Jerome Powell wasn’t as dovish as they’d hoped.

Added to that, the European Central Bank is set to end asset purchases that have pushed billions of euros into higher-yielding markets such as Poland and Hungary. That may force eastern Europe’s central banks into rate increases they’ve long resisted.

In emerging Asia, economies that are heavily reliant on foreign investments such as Indonesia will continue to face the challenge of maintaining currency stability and stemming the risk of outflows.

Trade Wars and China

Chinese President Xi Jinping remains defiant, telling some of the nation’s most influential military and business figures that Beijing wouldn’t back down quickly to U.S. trade and investment demands. Any additional increase in tensions between the world’s two dominant economies would probably deal a blow to Asian assets. They’ve already taken a hit, with China’s main stock index on track for its worst year since 2008 and equities in South Korea and Taiwan also falling sharply.

Populists

Brazil and Mexico will start 2019 with new populist presidents, albeit from opposite ends of the spectrum. Brazilian stocks have risen to record highs after President-elect Jair Bolsonaro said he’d sell dozens of state-owned companies and picked University of Chicago-trained Paulo Guedes as his chief economic adviser. Still, the right-winger faces a tough challenge reforming the country’s generous and exhausted pension system, which will be key to sustaining the market rally.

In Mexico, leftist Andres Manuel Lopez Obrador, who came to power this month, is keeping traders on the edge after canceling a $13 billion airport. Some concerns have diminished amid a 2019 conservative budget plan and after bondholders accepted Mexico’s offer to buy back $1.8 billion in debt used to fund the construction of the airport. Still, investors will keep a close eye on government spending to verify that the president’s proposal isn’t exceeded once the new social programs are implemented.

Russian Sanctions

Even after the Treasury said it’s ready to lift sanctions on one of the country’s biggest companies, investors will be watching for any movement from Congress on possible penalties on Russian sovereign debt or banks. If Special Counsel Robert Mueller’s investigation into the Kremlin’s interference in the 2016 U.S. election reaches a damning conclusion, that could be the trigger for new penalties.

Saudi Oil Woes

Brent crude’s plunge since early October to around $57 a barrel is bad news for many major developing economies, not the least Saudi Arabia. It needs prices as high as $95 per barrel to balance its 2019 budget, according to Bloomberg Economics. The economic squeeze -- combined with the Western backlash over columnist Jamal Khashoggi’s murder in Istanbul -- means that MSCI’s decision to include Saudi stocks in its emerging-market index from next year might not be enough to attract the investment the kingdom desperately needs.

Elections

There are plenty of upcoming polls to keep traders on edge. Indians vote in a general election in April or May and analysts at Credit Suisse Group AG say markets haven’t priced in the risk of a coalition government emerging, which could derail Prime Minister Narendra Modi’s economic reforms.

Thailand is set to finally hold a vote Feb. 24 after several delays since the ruling party took over in a bloodless military coup in 2014, and investors are worried about the prospects for social unrest. Indonesia’s turn is April 17 -- a rematch between President Joko Widodo and his rival Prabowo Subianto.

In Argentina, Mauricio Macri, who’s popular with foreign investors, faces an election in October. With the economy in recession and inflation at almost 50 percent, investors are concerned that voters may turn to former president and populist Cristina Fernandez de Kirchner.

South Africa’s election in May will be a key test for President Cyril Ramaphosa. If his party fails to win a significant majority, he may be forced to delay market-friendly reforms such as revamping debt-laden state companies by retrenching workers or selling assets. That could trigger a credit-rating downgrade and billions of dollars of outflows, according to Citigroup Inc.

Nigerians also vote in mid-February. Their main choice is between President Muhammadu Buhari, who’s struggling to buoy an anemic economy, and former Vice President Atiku Abubakar, seen as more pro-business but who’s long been dogged by allegations of corruption.

©2018 Bloomberg L.P.