2015 was a challenging year for emerging market (EM) currencies, and 2016 is expected to bring with it some challenges too, albeit many analysts believe that the pace of depreciation will be significantly lower than 2015.
The concoction of expectations of a first US rate hike in over 9 years, coupled with Chinese GDP failing to meet market expectations, as well as the depreciation of the RMB have kept emerging market investors on the side-lines, with volatility expected to persist.
The strong USD, most notably against EM currencies, weakening China growth and deteriorating global trade are expected to continue to act as a drag on EM countries in 2016 as EM countries continue to experience a deteriorating balance of payments and a persistent adverse impact on growth.
Local EM political issues, coupled with the further deterioration in global trade and weak commodity prices are also expected to maintain downward pressure on EM currencies in 2016. In anticipation of this weakness, a number of central banks have counter-acted by adopting a more hawkish stance, driving real interest rates up and putting further pressure on growth.
Chinese GDP data fell marginally below the 7% level in its latest print, which might be considered to be a positive because the market was expecting sub 6% levels. Indisputably, however, the largest negative impact on emerging market growth in 2015 was the marked weakness in Chinese industrial demand and imports.
What is of greater concern is that the shift appears to be somewhat structural in nature, as the economy has moved away from capital-intensive investment and export-led growth to a more services based economy.
A few of the most important economic data releases (with particular importance given to the trend of the series of these data releases) to look out for in the weeks and months ahead are China’s demand for imports, especially commodities as well as their imports. Fears of a hard landing in China remain alive as the decline in the commodities space also had its fair share of contributing to risk-off mode which characterised most of 2015.
The weaker energy and metal prices were of particular concern as the outlook for Chinese and global GDP weighed on market sentiment. Any possible stabilization of supply and demand for oil in 2016 from current levels would be welcomed as this would also contribute to abating disinflationary fears.
This article was issued by Mark Vella, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.