A couple of weeks ago, finance ministers, central bank governors, and other interested parties, including lots of emerging markets-focused investors, gathered in Washington, D.C. for the IMF and World Bank Group’s Annual Meetings.
Listening to speakers, and talking to other investors, a couple of my key takeaways from the meetings would be as follows:
Firstly, it’s a constructive time for global growth. The major emerging economies are growing, led by China, but backed up by recovery in the likes of Argentina, Egypt, and Russia. On Europe, there is widespread optimism for the first time in a number of years. In the U.S., the IMF does not make any assumptions in its forecasts about the positive benefits of likely tax reform. Finally, and critically for emerging markets, in this benign growth environment, commodity prices are expected to remain supportive.
Where, though, are the risks? Somewhat to my surprise, these seem to pivot on geopolitical issues, principally those involving the U.S. For example, the state of NAFTA negotiations can only be described as fragile. At the same time, U.S. – Russia relations seem to be at multi-decade lows, as the Trump White House has abandoned ship on the matter. What implications does this attitude have for the Iran nuclear deal, for example? All this, of course, before we mention North Korea.
Perhaps geopolitical concerns can be overstated for markets, and investors should stick to their knitting and traditional fears! However, the extent of geopolitical uncertainty currently engendered by the White House was striking to me. It certainly puts into sharp relief the old idea that political risks in emerging markets are greater than those to be found in their developed market peers.