In This Week’s Issue…
by Alexander Kalis Managing Partner & Head of Investments at Milltrust International

After a year of double-digit returns, one of the key questions for emerging markets in 2018 is whether they will continue to be insulated from one another’s crises as was the case in 2017. Contagion, an intrinsic feature of the sector for years, shrank to such an extent that an almost 10 percent drop in Brazil’s currency in a single day in May had little effect on its emerging market peers. According to Reuters, it was both the case that investors now treated individual emerging markets on their own merits, rather than as members of a homogenous poor and crisis-prone bloc, as well as a function of central bank money-printing and near-zero interest rates propping the markets.

In Asia, China’s economy now begins 2018 facing what its own leaders call three years of “critical battles.” Those fights to tackle domestic debt, poverty and pollution pose a hat-trick of risks to the world’s No. 2 economy even before higher interest rates and trade war threats from the U.S. are taken into account. While the nation is starting from a position of strength, with full-year growth in 2017 poised for its first acceleration since 2010, the expansion is seen slowing in 2018. As a result, the government of Xi Jinping is signaling that it’s sanguine about more modest economic performance, if progress on the top risk — financial fragility — can be made.

A slowdown in construction is seen as ‘the biggest fault line’ for the country, and the real estate sector in general is one that Fang Zheng, portfolio manager of the Milltrust Keywise China Fund, is specifically shying away from as it faces increasing risks of stronger government controls, regulations, and new taxes in 2018.

In India, the economy still has serious upside according to many investors but the increasing price of oil could become a major concern, especially at above $70 per barrel. India is among the world’s largest oil importers and rising prices could result in higher inflation. Given that tighter monetary policy from the U.S Federal Reserve and the European Central Bank is expected to emerge in 2018, the Reserve Bank of India will most likely adopt a more hawkish stance in line with this. But 2018 could be the year of stock specific investing, rather, and V. Srivatsa, portfolio manager of the 4-star Morningstar rated Milltrust India Fund, believes that growth will return to the pharma sector in 2018, in particular.

In South Korea, strong exports drove the country’s economic growth in 2017. Thanks to a recovering global economy, South Korea’s exports hit a record 573.9 billion U.S. dollars last year, up 16 percent year-on-year. The economy is expected to continue its growth momentum, and expand by 3 percent in 2018. On top of this, in 2018 South Korea’s gross national income is forecast to surpass the 30-thousand U.S. dollar mark for the first time in the country’s history. But despite the bright outlook, there are still risks and uncertainties, not least the risk of a major conflict with North Korea. Moody’s lists the biggest industry casualties if such a horrific scenario were to materialise.

Elsewhere, with Southeast Asia’s record-smashing stocks powering toward 2018Morgan Stanley said in a report two weeks ago that ASEAN markets could see returns of up to 10 percent in 2018 compared with a base case of 3 percent for MSCI Emerging Markets, telling investors to focus on markets with accelerating earnings growth like the Philippines, Thailand and Singapore.

In Latin America, after two years of negative growth and four years of a slowdown, Latin America’s economy expanded in 2017 and experts predict the upward trend will hold in 2018. Of course, Brazil is facing a pivotal election this year and analysts are already warning of volatility. Unpopular incumbent Michel Temer faces an uphill battle to win a mandate, with scandal-scarred former President Lula da Silva making a case of his own. As a result, the country’s continued reform agenda is far from guaranteed.

Meanwhile, Mexico’s government denounced forecast price hikes by fuel retailers and tortilla makers. As inflation hovers near a 16-year high at just below 7 percent, officials insisted the forecast price spikes, which have triggered social media outrage and threats of protests, are not warranted. With presidential elections looming in July, the government is especially sensitive to the possibility that protests could further erode its support among voters.

In the Middle EastSaudi Arabia laid out the biggest spending plan in the Kingdom’s history in absolute terms when the government published its 2018 budget in late December. After two years of austerity measures and budget deficits following the oil price dive in 2014, the sizable amount of slated expenditures for this year could seem counterintuitive. Yet the amount of planned spending fits with the current turning point for the Saudi economy, which ranks as the world’s 20th largest in terms of gross domestic product, and meshes with plans laid out by Crown Prince Mohammed bin Salman for the country’s long-term economic future. But the budget also extends state support to Saudi citizens even though weaning its citizenry from their reliance on subsidies is a long-term reform goal. Moreover, to pay for its spending plan, the government is counting on untested new revenue sources, including newly instated taxes.

Change is now coming thick and fast to the kingdom, and several major reforms announced since bin Salman unveiled his Vision 2030 in 2016 will take effect this year. Life in Saudi Arabia will look very different by the end of 2018.

In Africa, in his first speech as leader of the ruling (South) African National Congress, taking over from President Jacob Zuma, Cyril Ramaphosa promised a radical overhaul of the South African economy and a battle against graft. He faces a daunting task: rebuilding an economy battered by years of misrule, corruption and the appointment of incompetent officials. Here are 8 ways he plans to fix South Africa’s economy.

In Russia, the state of the economy is currently one of the overlooked news stories from Russia this year. Despite economic troubles, Russian President Vladimir Putin continues to lead the race for the country’s upcoming elections and recently indicating that he will seek to modernize the Russian economy if he’s re-elected to another term next March.

Finally, Byron Wien, vice chairman at Blackstone and a 50-year veteran of Wall Street, sees market correction, bitcoin crackdown and no proof of Trump-Russia collusion in 2018 in his annual list of market surprises.

No doubt we have another fascinating year to look forward to for our investment regions.

Wishing you a successful and prosperous 2018 from all of us at Milltrust International. 

Click here to read.

Click here to subscribe.