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EM Monitor - 2020 outlook

December 2019

Our convictions for emerging markets in 2020

GDP growth should be stronger across many emerging markets in 2020 as Anjeza Kadilli explains.

A stronger year ahead for emerging markets

After a lacklustre performance in 2019, we expect 2020 to mark a shift in GDP growth momentum for the majority of emerging markets. In particular, we think Turkey will see the biggest growth rebound after a difficult 18 months. Next is Argentina, where we still forecast negative GDP growth, but at a much smaller magnitude than in 2019.

Clearly, both of these markets remain in stressed economic conditions, but overall, across all other emerging markets it is a more positive picture, underpinning our bullish house view.

Bouncing back...
Fig.1 - Real GDP growth change: 2020 forecast less 2019 forecast (%Y/Y)
fig 1the majority or emerging markets are forecast to have higher GDP growth in 2020 than in 2019

Source: Pictet Asset Management, CEIC, Refinitv, Bloomberg; November 2019. 

Indeed, as the chart below shows we expect all emerging markets, except for Argentina, to deliver positive real GDP growth in 2020.
Growth in positive territory
Fig.2 - Real GDP growth 2020 forecasts
fig 2: we expect all emerging markets apart from Argentina to deliver positive real GDP growth in 2020

Source: Pictet Asset Management, CEIC, Refinitv, Bloomberg; September 2019. 

Asia to remain the growth engine of emerging markets

Drilling into regional clusters, we believe Asia ex-Japan will remain the growth engine of EM, despite slowing growth in China. Latin America and EMEA however are picking up but are still forecast to deliver GDP growth only half as significant as Asia.
Asia: the EM locomotive
Fig.3 - Real GDP growth: Asia ex Japan, EMEA, Latin America
fig 3: Real GDP growth remains significantly higher in the Asia region than in either Latin America or the EMEA region

Source: Pictet Asset Management, CEIC, Refinitv, Bloomberg; November 2019.

Inflation under control

Another positive tailwind for EMs in 2020 is a relatively benign inflation outlook, except for outliers such as Argentina and Turkey (in the former inflation should be around 50% in the year ahead).
The genie appears to be back in the bottle...
Fig.4 - 2020 CPI inflation forecasts
fig 4: Aside from a few, Inflation in most emerging markets is below their central banks' targets

Source: Pictet Asset Management, CEIC, Refinitv, Bloomberg; November 2019. 

Final thoughts: will EM exports shift to China?

An interesting chart to watch will be the one below, which tracks the share of EM exports to the world’s two biggest economies: the US and China. With the trade tensions between the two ongoing will we see a crossover or narrowing of the gap in 2020?  Our view is there will be a narrowing as China becomes an increasingly dominant source of exports for emerging markets.

China vs US

Fig.5 EM exports to China and to the US as share of GDP

fig 5: As a percentage of GDP, EM exports to China are lower than EM exports to the US. However we think the gap will narrow

Source: Pictet Asset Management, CEIC, Refinitv, Bloomberg; November 2019. 

Magnus for Pictet

Chances of a 'melt-up recovery' - the view from our EM Equity team

By Kiran Nandra, Senior Product Specialist

After the volatility of 2019, we expect 2020 to be the year of ‘melt-up recovery’ linked to both an easing of trade tensions as well as very supportive policy easing measures across emerging markets (see chart below).

EM leading indicator and central bank actions
supportive monetary policy should help emerging market assets in 2020

Source: Pictet Asset Management, CEIC, Refinitv, Bloomberg; November 2019. *GDP weighted. **30 central banks

This is in addition to an already wide discrepancy between emerging and developed market business manufacturing surveys where the gap is currently the highest since 2013 in favour of EM – see below.
Emerging and developed manufacturing surveys
manufacturing sentiment surveys are significantly more favourable in emerging markets compared to developed

Source: Pictet Asset Management, CEIC, Refinitv, Bloomberg; November 2019. *10 manufacturing PMIs GDP weighted. **22 manufacturing PMIs GDP weighted. 

So where does this leave us? 

Overall, among emerging markets we view the Asia ex-Japan region as highly attractive, particularly in specific niches of the market. For example, as bottom-up investors, we have been reducing our South Korea underweight for various reasons: 

1. We are seeing a more benign domestic environment especially for an economy as exposed to global trade as South Korea
2. Corporate governance is showing nascent signs of improvement 
3. A stronger outlook for the tech sector, in particular the memory chip industry.