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03 Dec 2018 | By Nick Payne

Has Santa come early for emerging markets?

Nick Payne believes the respite in the Sino-US trade war is an early Christmas gift for emerging market equities.

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The 90-day truce in the Sino-US trade war agreed between President Xi and President Trump in Buenos Aires is a welcome development in reducing tension. The very fact that both sides have reopened dialogue is a good step forward and should help sentiment and asset prices in emerging markets. Of course, hard yards lie ahead in reaching a comprehensive agreement, but for now, both sides can claim a “win”. US consumers can cheer that their manufactured-in-China favourites like iPhones will not be increasing in price for Christmas.

Emerging markets have faced three principal headwinds in 2018 – a hawkish US Federal Reserve (Fed) and strong US dollar, the trade war and a decelerating Chinese economy. We have now seen two of these three improve at the margin – the trade truce and recent more dovish comments from Fed Chairman Powell. For the third, the Chinese authorities started loosening monetary and fiscal policy in the summer and further stimulus is likely before year end. Expect to see better economic data in 2019.

Corporate profits from emerging market companies remain decent, yet valuations and sentiment are at multi-year lows. After a torrid year perhaps emerging markets investors can indeed hope that Santa has arrived early.

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