10 Sep 2018
Gordon Fraser, lead portfolio manager of core emerging markets (EM) Equity portfolios
“One of the key tenets of our macroeconomic philosophy is that emerging markets are cyclical and mean-reverting. This only works if debt is sustainable. At the moment, there is one stand-out country with a debt sustainability problem – Turkey. Argentina also looks weak, but the rest of emerging markets are looking reasonably strong on debt sustainability measures. The majority have a debt to gross domestic product (GDP) ratio below 30%, and some of the largest EM run significant surpluses.
Some EM have high optical external debt levels – Eastern Europe, for example. However, they have been running high debt levels since 2005 and many run current account surpluses and are paying down overall debt. There are some countries that look more vulnerable, such as the Ukraine, but they are not relevant from a stock market point of view. As such, we are not worried by external debt levels in EM.
Source: BlackRock, September 2018
The looming Brexit deadline, coupled with trade sanctions from the US has hit Britain’s manufacturers, according to the figures for August. Growth slowed to its lowest level since July 2016, pulled lower by a fall in exports. Economists are now suggesting that the sector could remain in recession for the rest of the year.1
Britain’s shop prices rose as the heatwave pushed up the cost of fruit and vegetables. The latest figures from BRC-Nielsen figures show shop prices are 0.1% higher in August. This is the first time they have risen since April 2013. Food inflation hit a seven-month high of 1.9% in August.2
Confidence for UK services firms has hit a five-month low, according to the latest purchasing manager’s index (PMI) indices for August. However, at 54.3, the index reading was better than expected and still indicates expansion. This suggests overall growth for the UK economy of 0.4% for the third quarter of 2018.3
Sterling slid against most major currencies after Michel Barnier, the EU’s lead Brexit negotiator, said he “strongly” disagreed with major portions of the UK’s Brexit proposals.4
US manufacturing data posted the strongest growth in 14 years, with the Institute for Supply Management purchasing manager survey leaping to 61.1. Barring one month in 2004, US manufacturers apparently have not felt more confident since 1984. This is likely to add upward pressure on the dollar.5
In a bid to halt its escalating currency crisis, Argentina announced new austerity measures, including cutting spending and raising export taxes. The country will also receive $50bn (£38.8bn) of funding from the International Monetary Fund. The peso has fallen by half against the dollar this year.6
1 UK manufacturing growth hits 25-month low, Guardian, September 2018
2 UK shop prices rise for the first time in more than five years, Guardian, September 2018
3 Brexit uncertainty batters UK services business confidence, Independent, September 2018
4 Sterling faces sharpest fall in a month on Brexit jitters, weak data, Financial Times, September 2018
5 US manufacturing survey raises the stakes for emerging markets, Financial Times, September 2018
6 Argentina launches fresh austerity measures to stem peso crisis, Guardian, September 2018
The office of national Statistics publishes its monthly estimate of GDP for the UK. Last month, warmer weather helps British economy grow by 0.4%, in spite of the weakness of the manufacturing sector, which continued to be in recession.7
UK unemployment statistics – The three months to June saw the jobless rate decline to 4%, its lowest level since the winter of 1975. There are signs that UK businesses are struggling to recruit.8
A raft of Eurozone economic data – including aggregate GDP, PMI and retail sales – will show whether the region is starting to pick up again after a lacklustre start to the year.9
US jobs data – US economic growth numbers have been exceptionally strong and this is likely to be reflected in jobless data. This may prompt fears of over-heating.9
China data - Markets haven’t been focused on China recently, but trade, balance of payments and money supply data will show whether the world’s second largest economy is taking a hit from the trade war with the US.9
7 UK government Statistics, www.gov.uk, September 2018
8 Pay growth slows to weakest in a year despite fall in joblessness, The Guardian, August 2018
9 Economic Calendar, Financial Times, September 2018
The opinions expressed are as of September 2018 and are subject to change at any time due to changes in market or economic conditions. The above descriptions are meant to be illustrative only.