Five More Emerging-Market Perils May Lurk After August Shocks

For a month that started with Societe Generale SA and Investec warning of the dangers that the vacation season typically presents for emerging markets — falling currencies and volatility — August has gone swimmingly.

Investment flows are recovering, stock-market capitalization is at an all-time high and average spreads on dollar bonds are at their lowest since early March. And that’s despite gyrations in the U.S.-China trade narrative, a fresh bout of market turmoil in Turkey and nationwide protests in Belarus.

But there’s no room for complacency. For one thing, all the above-mentioned risksremain, plus the doggedly solid Covid-19 infection rates across many parts of the developing world.

Then there’s the worrying fact that the gains, in stock markets at least, are largely driven by a handful of mostly Chinese companies. Longer term, there’s the unavoidable prospect that the wall of money that the Federal Reserve and other central banks are throwing at markets will start to ebb away. And before that, there’s the small matter of the U.S. election, an event that may have negative consequences irrespective of who wins.

So what might the rest of 2020 have in store? And how will it play it out into next year?

The following is a summary of five hypothetical scenarios that money managers say may take traders by surprise.

Trump’s Chums

  • With Biden ensconced in the White House, investors look forward to swift steps rebuilding bridges abroad that were burnt by the previous administration. Instead, he terminates the bromance Trump nurtured with strongman regimes in Russia, Turkey, Egypt, the Philippines, Poland and Hungary. Individual markets targeted by Biden sell off as trade and investment are seen withering. Emerging markets slide more broadly as investors ponder who’s next.
Timothy Ash, a strategist at BlueBay Asset Management in London
“Biden will focus on human rights and democratic standards as a central theme in foreign affairs. Expect more sanctions”

China Alone

  • Growing anti-China sentiment and anxiety over national security swamp President Biden’s attempts to turn bickering with Beijing to constructive dialog. China’s isolation increases as Biden pursues a similar policy to his predecessor with the approval of nations including the U.K. and India. Investor appetite for Chinese assets takes a hit and the resulting selloff drags down emerging markets. Alternatively, a re-elected Trump doubles down on containing China, deepening the new cold war and eventually sparking military conflict in the South China Sea. Global markets nosedive.
Norman Villamin, chief investment officer of private banking at Union Bancaire Privee in Zurich
“Increasingly, there’s a multinational agreement that China’s relationship with the rest of the world must be recast”

Latam Unrest

  • Violent demonstrations deepen from Sao Paulo to Santiago as citizens take to the streets to protest poverty levels and runaway Covid infection rates. While Asian economies establish themselves as the world’s manufacturing hub and eastern Europe catches up with richer nations, Latin America gets left behind. The region underperforms other emerging markets and Argentina tightens capital controls. Index provider MSCI Inc. pulls the nation’s emerging-market classification.
Daniel Tenengauzer, head of markets strategy at Bank of New York Mellon Corp. in New York
“LatAm will witness meaningful jumps in poverty and extreme poverty rates as a result of the pandemic”

Turkey Power Grab

  • President Recep Tayyip Erdogan doubles down on hisassertive policies in the eastern Mediterranean as his popularity sinks due to the weakening economy. The European Union decides to impose sanctions in response to Turkey’s oil-exploration efforts around Cyprus. In a vicious circle, the lira tumbles and authorities impose ever stricter controls on the market.
Cristian Maggio, TD Securities strategist Cristian Maggio in London
“If tensions between Turkey and Greece escalate, then I can see more significant sanctions coming”

Libyan Civil War

  • The civil war in Libyaspirals, pulling in countries such as Egypt, France, Turkey, the United Arab Emirates and Russia. Neither the EU nor the U.S. can calm the situation and investors pull their money out of the embroiled nations. There’s a a selloff across the region and emerging-market credit-default swaps soar.
Simon Quijano-Evans, chief economist at Gemcorp Capital LLP in London
“(The region around Libya) has really got itself into a geopolitical quagmire that none of the global powers appears able or willing to resolve”

— With assistance by Srinivasan Sivabalan

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