Mounting trade tensions raise risks for global equities, emerging markets. Sudden stop in non-resident portfolio equity flows to China. Big drop in U.S. outward direct investment—mostly impacting mature economies, but EMs also at risk. Potential disruption to supply chains; exporters under pressure.
Argentina agreed a $50 billion bailout with the IMF involving tough conditions on fiscal adjustment. Can Argentina deliver on the IMF program? It will require a large fiscal effort in an election year. Some IMF programs delivered similar adjustment, but many fell short of what Argentina is aiming for.
We recently examined the pattern of EM flows to emerging markets, where our innovation was to control for the role of reinvested earnings which count as FDI but are not true capital flows in any conventional sense. This Global Macro Views expands that analysis to include frontier markets. In absolute terms frontier markets receive a small share of “true” FDI flows, but relative to their GDP and ability to absorb inflows, they receive quite a lot. The picture is most positive for Sub-Saharan Africa, least so for North Africa.
Market positioning highlights optimism on U.S., Japanese equities, risks for Treasuries, EMs. U.S. yield curve flattening leaves bank stocks unruffled but the performance of Euro Area banks remains closely tied to yield curve movements. A more hawkish tone from the Fed adds to EM headwinds, particularly where there are idiosyncratic risks. Differentiation across EMs continues, though a Treasury selloff/stronger USD would raise contagion risk
