Emerging markets around the globe have experienced rapidly changing political, social and environmental conditions in 2019.
In a recent episode of the UBS On-Air Podcast, Alejo Czerwonko, Emerging Markets Strategist Americas from the UBS Chief Investment Office, explained that “policymakers, electorates and investors face complicated choices in 2020.”
Here are some of the top takeaways from the podcast episode and accompanying UBS Emerging Markets report A year of consequential choices.
- Moderate but stable global economic growth is expected in the year ahead.
- In the first half of 2020, a 5% to 10% return is expected on emerging market equities.
- Discussions of fiscal policy and structural reform will be more common in the year to come, particularly in emerging markets.
Balancing bonds and equities
“All things considered, our baseline scenario calls for moderate yet stable global growth in the year ahead, with risk assets continuing to gain ground,” Czerwonko shared. “We expect emerging market equities to post 5% to 10% returns in the first half of 2020.”
In the latest UBS Emerging Markets report, the company shared that it remains “skeptical of the prospect of a meaningful trade deal” between the US and China, at least in the near future, but suggests it’s possible that “incrementally positive news” will support equity markets. The Emerging Markets Team has thus decided to close its underweight to both emerging and developed market equities.
“We continue to recommend an overweight to EM hard-currency bonds, and prefer a basket of EM currencies in our FX strategy, as the environment remains supportive of carry trades,” Czerwonko explained. US-dollar sovereign bonds continue to remain attractive with 2% to 4% total returns expected.
The Emerging Markets Outlook report also suggests that emerging market equities are expected to show “characteristically high levels of volatility.” That said, their annual return of nearly 9% remains “unlikely to be matched by developed markets.”
Economic and political factors abound
Emerging markets will be subject to a number of choices themselves. “Thinking of countries like Mexico and South Africa, they are being followed very closely by credit rating agencies and they face negative rating actions, potentially,” Czerwonko said in the podcast interview.
“We are cognizant that monetary policy, primarily in the developed world, is facing limitations in terms of how much it can continue to help the current macroeconomic cycle,” Czerwonko continued. “And therefore, we think 2020 will be a year that discussions of fiscal policy and structural reform will be more common.”
While he deems these discussions appropriate, Czerwonko does not anticipate “broad fiscal easing” in developed markets, such as the US and Europe.
The 2020 market strategy
Looking ahead, gauges of economic policy uncertainty tracking historical highs suggest markets will remain difficult to read.
“Our playbook to successfully navigate 2020 and beyond is a simple one,” the EM Outlook report concludes. “First, define clear financial goals as informed by our Liquidity. Longevity. Legacy. framework. Second, design a concrete plan to meet these goals. And third, stick to the plan and remain invested.”
Don’t miss the “Top charts for 2020” section of this month’s CIO report, which includes the UBS graphical approach to illustrating key trends for the emerging world in the year ahead. In the meantime, listen to the full podcast and read the report to fill in the blanks on your 2020 emerging markets investment strategy.
If you are looking for more help building and managing your portfolio, reach out to your trusted UBS Financial Advisor today.