Emerging markets can look forward to a better 2019

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Industry experts are predicting that assets from emerging markets will be bouncing back in 2019 as tensions from the trade war between the US and China are expected to ease.

On Sunday, September 29, a trade breakthrough was announced by US President Donald Trump between the US, Mexico and Canada, one that’s expected to help turn the tide in the US-China trade war as well. Increasing tariffs have affected not only the economies of both global superpowers, but of other countries as well.

A truce between the US and China would help assets from emerging markets all over the world.

Experts predict that de-escalation between the two nations will begin by mid-2019. The head of Asia trading strategy at Citigroup Global Markets in Hong Kong, Mohammed Apabhai, says that at that time the US will have been done with new tariffs imposed on $500 billion with of Chinese goods. Any countermeasures by China would have a negative effect on the US, and this would likely push the two countries to come to an agreement.

This, in turn, would mean “emerging markets will bounce quite hard”, according to Mr. Apabhai.

An additional tariff of ten percent was implemented on US$200 billion worth of Chinese goods just last week. In retaliation, Chinese President Xi Jinping raised duties on US$60 billion worth of products from America, which strengthened speculation that the end of the trade war is not yet in sight.

Experts say that the recent NAFTA deal paves the way for negotiations with China.

The head of equities at Franklin Templeton in California, Stephen Dover, says, “The breakthrough with Canada will put fresh pressure on China, which is facing a clear weakening of its manufacturing sector.  I think the US and China will be back at the negotiating table later this fall, with signs of progress on market access for key American sectors such as financial services.”

A Bloomberg survey of more than 60 economists showed they forecast that economic expansion in the US will slow down to 2.5 percent in 2019, down from 2.9 percent in 2018, and in China, their prediction is 6.3 percent growth in 2019, down from 6.6 in 2018.

This predicted slowdown could bring both countries to the table faster in order to obtain a trade deal.

The head of fixed income at Matthews Asia, Teresa Kong, said, “When the repercussions start to take a toll on the economy, Trump might consider pulling back.” Close to 70 percent of American businesses in China are against using additional tariffs as a weapon, and only 8.5 percent are in favor of them.

And since President Trump will be getting ready for reelection in 2020, this would provide extra incentive for him to reach a deal with China, a move that would be considered as a win for his administration.

This would be good news for emerging market assets, since stocks have plummeted and currencies decreased in value in comparison with the strong dollar, the trade war and increasing interest rates in the US.

Kathy Jones, the chief fixed income strategist at Charles Schwab, said, “any indication that the US and China are resolving trade differences would likely be good for EM assets,” especially Asian stocks.

The chief multi-asset strategist at BlackRock Investment Institute,

Isabelle Mateos y Lago, says, “It’s plausible that an agreement can be reached some time next year on a narrow set of issues.”

But emerging markets are also dependent on growth in Europe, the US and China. Ms. Mateos says, “As long as these regions keep growing at a healthy clip, EM should be fine.”