The 9th Annual London Conference GET READY TO INVEST

9 - 12 September 2019Emirates Stadium
London, UK

A shifting backdrop

Expectations for US interest rates have taken a 180-degree turn since the end of 2018 and markets are now speculating on when we will see the first rate cut. The changed in the Fed's tone lines up with increasing concerns by major central banks of a global economic slowdown and political uncertainties, such as Brexit and the US-China trade war. Unsurprisingly, the anticipation of a rate cut fueled a strong rally in Frontier Emerging Markets (FEMs) in early 2019, but country-specific factors will ultimately determine the direction of investment flows.

Interest rates and stimulus measures

We expect that GCC countries, pegged to the US dollar, will generally follow the US Federal Reserve. Egypt, whose central bank surprisingly cut interest rates in February, has further room to cut its rates as inflation continues to fall, with Sri Lanka and Morocco expected to follow suit. Conversely, Pakistan is likely to continue raising its rates as it seeks IMF funding, while Kenya will have limited room to manoeuver due to caps on lending rates. Global risk appetite is expected feed into rate policy, particularly for major borrowers such as Nigeria.

Index trades

2019 has become a bonanza year for index trades. Saudi Arabia's achievement of MSCI and Financial Times Stock Exchange (FTSE) Emerging Market (EM) EM status spurred a USD 17 billion increase in passive flows to the Kingdom to date. Kuwait is also preparing to attain FTSE EM status this year and MSCI EM status in 2020. In light of these upcoming upgrades, MENA's weight in the MSCI EM will rise to c. 5%. Argentina's 2019 EM upgrade – and Kuwait's next year – will cause another shakeup for FEM valuations. Investability remains a constraint, and custom benchmarks are becoming more common for small FEMs.

Export diversification

Investors continue to look for growth, with trade tensions between the US and China creating accretive opportunities. Vietnam continues to grow rapidly, backed by high levels of FDI and productivity and enhanced diversification in exports. Morocco and Egypt have also broadened their export offerings, while Pakistan, Kenya and Bangladesh have struggled to diversify.

Growth in the GCC

Having successfully developed their capital markets to achieve EM status, GCC member countries are now working to achieve the more difficult task of diversifying their economies and increasing their local labour force participation. GDP growth remains slow in Saudi Arabia, but new regulations are supporting company-level growth in sectors such as retail and insurance. Oil prices remain critical for market sentiment in oil-exporting economies, but a substantial surge in its pricing risks diluting the impetus for reform.