Emerging markets – a bumpy road ahead? - BNP Paribas CIB
 
Thursday 13 June 2019

What are the most pressing issues facing the emerging markets today? Marcelo Carvalho, Head of Global Emerging Markets Research at BNP Paribas discusses these and other challenges in a sector experiencing widespread geopolitical volatility and rocky macro conditions.


Slowing global growth, trade tensions and central banks were among the topics discussed at the London School of Economics' (LSE) 10th annual Emerging Markets Forum. Marcelo Carvalho, Head of Emerging Markets Research at BNP Paribas, joined other industry leaders to discuss these and other challenges in a sector experiencing widespread geopolitical volatility and rocky macro conditions. What are the most pressing issues facing the emerging markets today? And what are the main risks currently facing global markets?

Not too hot, not too cold

While growth in core regions such as China and the Eurozone has slowed, according to Carvalho, an immediate recession is not currently expected. "Despite the unpredictable market gyrations and trade tensions, the global economy was not showing significant signs of strain," he said. Nonetheless, the risk of a recession actually materialising cannot be discounted, with some experts predicting a 25% probability of one happening.

Central banks running out of steam

Carvalho observes that "were a recession or a severe economic downturn to strike, some central banks could find themselves highly challenged". He noted that the US Federal Reserve, which increased interest rates throughout 2018 by a full percentage point to 2.5%, still had room for manoeuvre to stimulate the economy. The European Central Bank (ECB), however, has fewer options, mainly rate tiering – lowering the charge banks pay on some of their excess cash reserves – or further quantitative easing (QE).

Other panellists said additional rounds of central bank-led financial asset purchases would exacerbate asset price inflation. A speaker urged central banks to exercise caution about implementing negative rates and perpetual QE, citing the example of Japan, which, having adopted such monetary policies for two and a half decades, has experienced stagnation.


"Were a recession or a severe economic downturn to strike, some central banks could find themselves highly challenged."

Marcelo Carvalho, Head of Global Emerging Markets Research
 

Influencers for emerging markets

Continuing Brexit uncertainty was not the most important dynamic in terms of impact on the emerging markets. Instead, Carvalho believed a weakening USD would help strengthen emerging market currencies and assets.

China

The escalating US-China trade dispute was discussed at length. Experts believed China's trade corridors were likely to dramatically expand once the Belt and Road Initiative, China's international development strategy, got fully underway. The scheme, which forges investment and trading links between China and nearly 80 other countries, is likely to open up a number of new growth channels – although there are concerns about the level of debt being accumulated in some of the participatory markets.

The biggest risk yet

The impact of climate risk is one theme not yet covered by many emerging market watchers. According to data released at the World Economic Forum in January 2019, 3˚C rise in temperatures could wipe out one-quarter of global GDP if left unaddressed. A number of central banks, along with the Financial Stability Board (FSB), have pointed to climate change as a systemic risk, for which firms must prepare.

The potential for wholesale physical and infrastructural damage is significant. Moreover, financial institutions could be adversely impacted by a sudden transition towards a low-carbon economy, or stranded asset risk, whereby institutions are unable to dispose of once valuable holdings that have morphed into liabilities because of the shift away from fossil fuels, pollutant energy sources or antiquated technologies.





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