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Weakening global growth data points to end-of-cycle dynamics. However, a pause in US rate hikes could be beneficial for emerging markets.
2018 was largely a US exceptionalism story, with the economy enjoying above-trend growth even as recoveries elsewhere faded. The resultant dynamic of rising core rates, tighter financial conditions and dollar strength created an unfavourable environment for emerging markets. This year, slowing global growth poses new challenges, especially as business cycles are peaking. However, all is not gloomy for emerging markets. With US data having entered a prolonged patch of softness, an earlier-than-anticipated pause in the interest rate hiking cycle from the Federal Reserve (Fed) looks more likely. In the last five cycles, emerging market debt (EMD) has tended to rally after the last Fed interest rate hike of the cycle. Furthermore, even if financial conditions tighten further, EM countries such as Indonesia and South Africa have already made policy adjustments to address their external vulnerabilities. Meanwhile, signs from the US-China trade discussions look positive. With challenging structural issues such as intellectual property rights still to be addressed, we don’t expect a quick resolution, but recent negotiations show willingness and may lead to a pause in escalation.
Source: Bloomberg, J.P. Morgan Asset Management; data as of 7 December 2018. Average returns of five previous cycles: 1994-1995, 1997, 2000, 2006, 2015-2016. *Returns may not be available for all cycles. ELMI = JPM ELMI Plus. EMBIG = JPM EMBI Global Diversified. GBI = JPM GBI-EM Global Diversified. DXY = US Dollar Index.