Ricardo Adroguè, Head of Global Sovereign Debt and Currencies, addresses the many risks facing the global economy—specifically China, Argentina and the Middle East—and explains why active management is critical to performance.
Throughout 2019, we’ve watched as myriad macroeconomic risks—including a global growth slowdown—have created headwinds and uncertainties for emerging economies. As we look across the emerging markets debt (EMD) landscape, a few countries stand out in that respect—perhaps most notably, China. Can you talk about your view on the situation there, and how it’s impacting EMs more broadly?
From a market perspective, arguably one of the biggest risks facing 2020 is a slowdown in the economic growth of China. Traditionally, it’s grown at about 6–7% annually. But the current economic data suggest that the country’s growth is now slightly below that, closer to 5.5%. Interestingly, the government does not seem overly concerned about that drop. In fact, the Chinese authorities appear to have intentionally allowed the economy to slow down more than expected. At this point, the reason remains unclear. It may have to do with an overall economic shift from manufacturing to consumption, or it may have to do with changes in international trade relations. What we do know is that exports to the U.S. have come down quite a bit since the start of 2019, and the Chinese government—despite the constant back-and-forth in daily headlines—does not seem to be in a hurry to reach a trade deal.
In fact, we believe China is willing to tolerate the negative economic consequences of the trade tensions through 2020, most likely because they perceive that a trade deal with President Trump’s successor—in the event that he does not win re-election in the U.S.—will be more beneficial. It is notable that Trump’s own social media posts about the progress of trade negotiations have resulted in less market reaction recently, suggesting that markets are being less influenced by rhetoric alone.
What we are seeing here is essentially a reversal of globalization—where Trump’s trade policies indicate a disengagement of the U.S. from the rest of the world. The U.S. and China account for approximately 40% of global trade. So, on a longer-term basis, this lack of global leadership could have material economic impacts throughout the globe—particularly for emerging economies that rely on trade to fulfill their need for goods and services.