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Michael Reynal, Chief Investment Officer of Sophus Capital.
Following last year’s debt struggles in the face of rising interest rates in the U.S. and tightening measures by the Fed, we’re seeing in 2019 a much better environment. While last year we expected the Fed to continue to hike rates and, following the growth surge after the fiscal cuts [and] the tax cuts in the U.S., we were worried that the Fed was going to continue to tighten not only at the end of 2018, but into 2019 and 2020. That has now reversed, and at this point in time, early 2019, we’re looking for the Fed to flatten out and maybe put in one, possibly two, rate hikes over the next year or so.
If anything, we’re worried about the economy in the U.S. Why does this matter to emerging markets? Because last year, as people worried about the Fed tightening and tightening Liquidity, [a] number of currencies and economies started to slow dramatically. Let me be specific. In 2018, the Argentine peso fell by 50%—that’s five-zero. The Turkish lira fell by 28%. The Russian ruble by 17%. The Brazilian real by 14, and the South African rand by 13.5. These [were] all indicators of countries struggling with debt and whose currencies had to suffer in order to help rebalance their capital accounts and current accounts.
Once those currencies devalue, however, competitiveness kicks in. In other words, the Argentine cost is 50% below what it was before the devaluation. Their ability to compete is that much more significant. In a calmer environment, as we see in 2019, these countries that suffered these devaluations may not be winners. But the downside is much more limited and arguably, again in a calmer, more stable environment, they should have a positive outlook.
For 2019, we are looking somewhat more favourably at South Africa and Brazil, for example. While we’re still worried about Turkey from a political perspective, we’re less worried than we were previously from an economic perspective and a capital perspective. Argentina remains at the mercy of its political situation, so we’re staying clear for now, but we know that the Argentine market is extremely cheap, and we’re looking for signals of stabilization at the political level.
Lastly, amongst those countries that were most affected by the turmoil in 2018, Russia is looking quite positive, mostly because the price of oil, having dipped at the end of 2018, has rallied back up again. And Russia remains one of the large oil exporters in the world today. Furthermore, the ruble is cheap, it’s competitive and, for better for worse, Vladimir Putin’s government is very stable. So yes, we are looking at some of these riskier markets with more interest, and yes, we think that those currencies that were hurt by the Fed’s tightening policies in 2018 are being helped by The Fed’s potential loosening. We’re certainly a more stable outlook in 2019 and 2020.