Developed driving emerging markets
Given that developed markets were a
signifcant part of the energy that propelled
emerging markets upwards in 2017, it follows
that the potential tipping points in emerging
markets in 2018 will involve effects from
developed regions.
Specifcally, two risks are in
play. The first is possible sanctions against
Russia and the second is the fallout from
incorrect predictions of US treasury yields.
If sanctions are implemented against
Russia, they will affect emerging countries much
farther afeld. That is because being overweight
Russia has proved to be the most crowded trade
among emerging market investors. Optimism on
the country is the result of structural reforms it
has implemented, particularly those that have
led to the increased credibility of its central
bank. Impressively, it has tamed infation that
was running at 16 per cent in 2015 to under
three per cent now.
As a result, real wages have
reversed a downwards trend that saw them
losing ten per cent annually in 2015, when
infation was at its worst, to now be growing at
2.5 per cent.
Consequently, household
consumption has grown to 2.5 per cent,
important because it is the key contributor to
economic growth.
Yet, should broad sanctions be imposed,
there is a risk that signifcant amount of funds
would flow out of the country. In turn, this would
affect domestic Russian capital markets and
borrowing costs.It will also likely lead
to Brexit UK forming an economic and military
alliance with Russia.
euf:b18:74/nws-01