The 8th Annual London Conference Kick off your investment
  strategy to new frontiers

10 - 13 September 2018Emirates Stadium
London, England

A shifting backdrop

The prospect of a trade war, geopolitical changes centred on Iran and North Korea, the rising price of oil, a stronger US dollar, weaker commodity prices and a pivot in Chinese-led growth are among the key themes at play in 2018. Global investors will be carefully watching how these themes play out as they look for opportunities to deploy capital and capture growth from some of the world's fastest growing economies in frontier emerging markets.

Growth in select MENA and FEM economies will outpace the global average...

Global economic growth stood at 3.8% last year, the IMF estimates, and should tick up to 3.9% this year and next. Across our coverage universe, foreign capital flows are likely to continue favoring Egypt as the country delivers on its economic reform program, with falling interest rates and accelerating growth set to drive strong stock performance and positioning Egypt as a top pick within MENA and FEM. Nigeria is also at the forefront of FEM, where last year's devaluation, the recovery in oil prices and attractive valuations together promise good returns. .

...but EM face headwinds...

Emerging markets have been on a two-year rally that saw stocks and currencies hit their highest levels since 2007 – and institutional money flows into EM equities almost triple last year. As of early May, the MSCI Emerging Markets Currency Index has wiped out its year-to-date gains and investors have pulled more than USD 6 bn from EM bond markets since mid-April. US bond yields and a strong dollar will see capital inflows to emerging markets fall USD 43 bn this year to USD 1.22 trillion, the Institute of International Finance is now predicting. .

...is US policy (partly) to blame?

Federal Reserve Chairman Jerome Powell thinks the impact of US interest rate hikes on emerging markets "is often exaggerated," but the lure of 3% yields on 10-year US Treasuries — and the impact of a strengthening dollar — is difficult to ignore. The political backdrop is also in flux as the Trump administration withdraws from the Iran nuclear accord and rolls out a protectionist trade policy. s.

The greenback is on the march...

It's the currency in which c. 40% of global trade is invoiced, and emerging markets collectively owe more than USD 2 trillion in USD-denominated debt. The US dollar has been on a tear in recent months, bolstered by higher short-term rates and quantitative easing at the US Federal Reserve, making the greenback more attractive to foreign investors: Yields on 10-year Treasuries are breaking the 3% mark with increasing frequency. Rising oil prices (prompted by the US decision to pull out of the Iran nuclear agreement) and a weaker euro are also bolstering the dollar.

...and so is oil

Oil above the USD 70 mark is good news for the oil exporters in our coverage universe from Nigeria to Saudi Arabia, but could present challenges to growth and fiscal reform drives in net importers including Egypt. Saudi Arabia and Russia have signalled they will continue their production cuts into 2019, and Saudi appears unlikely to use its excess capacity to plug the gap that could open as US sanctions threaten to take Iranian crude off the board. New sanctions on Iran will ripple across its traditional oil export markets, particularly refineries in the UAE and Asia.

Outlook for China and impact of FEM

Industrial commodity prices are likely to be weaker in 2018 as China's government focuses on quality rather than quantity of future growth. Look for rising nitrogen fertilizer prices and good long-term growth in demand for natural gas. China will likely continue to invest heavily in key frontier emerging markets, supporting growth and improving infrastructure.

Potential FTSE and MSCI market upgrades bode well for passive flows

In a world in which passively-managed funds are in many ways ascendant, upgrades to emerging markets status will unlock new flows for markets including Kuwait and Saudi Arabia. KSA will be included in FTSE Russell's secondary EM grouping in March 2019, joining Russia, China and India with a 2.7% weighting. Next up: A potential MSCI EM upgrade for Saudi Arabia and Kuwait. Vietnam, while a major frontier market, still has work to do on foreign ownership levels before it can join the watchlist for an MSCI upgrade.

Elections and political impact on MENA and FEM

Political overhangs will be a feature of multiple FEM markets in 2018 and into the new year. Investors are waiting to see how the US withdrawal from the Iran nuclear accord impacts regional economies and political stability. Voters in Pakistan go to the polls this year and investors are watching to ensure the reform momentum continues in Egypt after the recent presidential election. Investors in Saudi Arabia are closely following the emerging reform story, and value remains locked up in Qatar until such a time as the Gulf political outlook improves. Overall, tensions within MENA are likely to mean that a number of regional markets will trade at a discount for EM peers.