The MSCI Emerging Market Index rose 1.69% in September. We expect growth in the emerging market to extend, but the dollar is likely to hold strong, which could limit the returns in EM. Our overall EM outlook for the year remains neutral.
One of the more notable policies enacted in the EM sphere was the unexpected corporate tax cut in India, amounting to more than US$ 20 billion. This has created a short-lived euphoria in the India markets, rising almost 8% over 2 days. Similar policy stimulus and structural reforms are taking place across the globe, such as the recent pension reform bill in Brazil, to counteract against the effects of the receding global economy via boosting confidence and investment. This is positive for EM going forward as the structural reforms offers great opportunities for their markets.
Yet warning signs continue to exist. The ongoing trade war remains one of the biggest threats to the EM economy, represented by the falling global manufacturing PMI, being in the downtrend and remaining in the contraction zone for 5 consecutive months. A recent regional outlook report released by the Asian Development Bank has scaled down the growth forecasts of most of the economies in the region, citing a more intensified impact from the trade war fallout. The Bank expects the effects to persist well until 2020, cutting forecasts by 0.3% for developing Asia in 2019 and 0.1% in 2020
Despite the shaky fundamentals globally, we believe that the trade war beneficiaries like Vietnam and Taiwan should continue to benefit from the effects of the trade war as production lines move out of China. Caution is needed before investing in EM due to the higher systematic risk.