As the US-China trade war rages on, investors must not lose sight of central banks and economic fundamentals
Hannah Anderson says news about interest rates and economic growth seems to get lost in the rapidly moving news cycle but when it comes to emerging markets, central banks are the players to watch
Markets are fickle by nature – what captures investor attention one day doesn’t even make the top 10 list of most-important items to watch the next. These short attention spans can make it tough to figure out what precisely is behind any day’s moves. It also makes it difficult to tell how a shift in the fundamentals will affect markets beyond investors’ reactions to the initial news – by the time a change in fundamentals actually alters market conditions, attentions have moved on.
On the other hand, markets have been rightly focused on central banks’ efforts to shore up confidence in local assets for much of the summer. In an environment of rising worries about external vulnerabilities in emerging markets, investors should have expected a good deal of central bank activity.
Watch: The origins and impact of the US-China trade war
When dealing with these competing narratives, I find it useful to divide central banks into three broad groups that help categorise their moves and the reasons for them, and thus, what market reactions should be to any change in policy. These groups are: the worriers, the liquidity drivers and the “wait-and-see-ers”.
The “worriers” right now include the central banks of Turkey, Argentina, Russia, Brazil, Indonesia and the Philippines. These banks have all raised rates in response to global (Turkey, Argentina) or local (Russia, Philippines) pressures. Changes in the economic fundamentals or investor attitudes towards each of these markets prompted rising worries about future conditions, which the central banks responded to, either proactively or belatedly.
The “wait-and-see-ers” represent most of the rest of central banks here in Asia. We are not immune to broader challenges in emerging markets, but domestic conditions have not warranted attention-grabbing moves from central banks. The banks in this group may well move to the “worriers” group by the end of the year – overheating domestic markets or rising inflation may prompt action from Thailand’s or India’s central bank.
However, for now, banks in this group are taking the same approach to their domestic markets that I am in trying to understand emerging markets as a whole – we’re waiting to see how fundamentals reassert themselves in a too-crowded news cycle.
Fundamentals are still shifting and investors in any asset class cannot forget about central banks; we are likely to see more actions in the rest of 2018. This narrative is still relevant for emerging markets, despite the fact that other developments are likely to grab headlines in any given week.
Hannah Anderson is a global market strategist at JP Morgan Asset Management