EM Outlook 2018

Looking into 2018, US policies will remain one of the biggest focal points for EM assets, even if it has felt like ‘waiting for Godot’.

With the European Central Bank and US Federal Reserve set to be in tightening mode throughout 2018, emerging market (EM) assets have a tough act to beat. 2017 will go down positively in history as the ‘big surprise’ for most emerging markets pundits, with flows into the asset class well above expectations after an already strong 2016. And, all this happened in spite of clear challenges from an imminent shift in US domestic and foreign policies.

Looking into 2018, US policies will remain one of the biggest focal points for EM assets, even if it has felt like ‘waiting for Godot’. EM local currency assets will closely watch the effects of US tax cuts, given possible US-dollar strengthening pressure from a more ‘introvert’ US economic policy. EM hard currency assets, on the other hand, will be focused on a more ‘extrovert’ US foreign policy, as partly reflected in the ‘political spread’ (or ‘p-spread’) that separates countries like Mexico, South Korea and the GCC (Gulf Cooperation Council) from their EM peers.