Emerging Markets Outlook 2020 – Endgame

Good, bad, or ugly?: The endgame could be good (if global growth momentum picks up), bad (if it remains weak and the US enters recession) or ugly (if a downturn is accompanied by financial stress or crisis). 

Bad > ugly > good in 2020: Our 2020 outlook is the “bad” scenario - EM FX weakens, sovereign spreads widen, and local bond yields fall further. The “ugly” outcome has a greater chance than the “good” outcome. Markets will only transition into a “good” scenario once policymakers deliver sufficient stimulus to revive global growth. 

FX: We expect currency depreciation induced by weaker global growth, headlined by a US recession and Chinese slowdown. Together with positioning constraints and a very low carry buffer, we see asymmetric downside risks to FX. 

Rates: Local currency bond yields can head marginally lower in most countries aided by global and domestic factors. However, duration exposure should be more selective compared to 2019 due to richer valuations and idiosyncratic risks. Sovereign credit spreads should widen as risk asset come under pressure. 

Africa: Yield, fundamentals, and diversification make some countries in Africa attractive. We have a constructive view on Egyptian FX, bills, and bonds and Nigerian OMO bills. 

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This editorial contains financial analysis which reflects the opinion of the Cross-Asset Research department of Societe Generale at the date of its publication. It does not necessarily reflect the views of the other departments of Societe Generale nor the official opinion of Societe Generale. This interview is dedicated to institutional and professional investors and is not deemed to be seen and used by retail investors for investment purpose. The viewers shall consult their own financial advisers to make their own appraisal.