Echoes of 2018

This month’s escalation of US-China trade tensions and renewed concerns about Argentina and Turkey’s economic vulnerabilities have clear parallels with 2018, when these same factors triggered a sell-off in most EM assets. But there are important differences this time. First, so far at least, financial conditions in most EMs outside of Turkey and Argentina have not tightened significantly. Second, currencies are unlikely to weaken by as much as they did over the second half of last year; valuations do not look too stretched and external vulnerabilities are generally quite low. Third, with inflation now weaker too, a spate of interest rate hikes like we saw over much of 2018 is unlikely. In fact, we think that many major EM central banks are likely to loosen monetary policy in the coming quarters.