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January 22, 2019


Investors re-enter EM markets, as EM funds attracted in excess of US$ 3.3bn in the last week.


United States

Fears over the global economy are weighing on the investors even though demand for factory goods remains solid. An index of U.S. consumer sentiment fell to its lowest level in more than two years in January. As recorded by the University of Michigan index, the decline reflected worries about the US Government shutdown, trade tensions, volatile markets, a cooling global economy and uncertainty over what the Federal Reserve will do next with the US benchmark short term rate. Since consumer spending accounts for two-thirds of U.S. economic output, less spending could reduce economic growth in the first quarter. Industrial production, a measure of factory, mining and utility output, rose 4% in December from the previous year, the Federal Reserve said in a separate report Friday. Durable consumer goods such as automotive products, home electronics and appliances led much of the increase, a sign that consumers may not be ready yet to cut back on their spending. Production of durable consumer goods was up 5.5% in December over the previous year. Production of defense and space equipment also rose.


The fundamentals of the US economy remain solid. Job data, measured by hiring is robust and wages are increasing, resulting in a growth in retail sales last year. Analysts see few signs of a recession brewing and expect consumer sentiment to rebound once the shutdown is resolved. The consumer sentiment index also fell the last time the government shut down in 2013 but recovered once the government reopened. Fed officials said in their January communique the economy is in good shape and they will be patient before raising interest rates again. The Fed raised the short-term benchmark Fed Funds rate four times last year by 0.25% each time. Most economists expect growth to slow this year. According to the forecast from Macroeconomic Advisers they lowered the expectation for first quarter economic growth to 1.4% due to reduced government spending related to the shutdown. That is a slower pace than the 2.8% growth the firm forecasts for the fourth quarter of 2018. The expectation is for slower growth in 2019 than 2018.



The European Central Bank (ECB) charges banks 0.4% to deposit money with the central bank, a negative interest rate. The bank appears ready to change it stance this year. However, they indicated that they would be no change in interest rate until the summer of 2019. Disappointing data have made it clear that the eurozone economy is weaker than the ECB expected. The ECB’s economists have reduced their growth forecasts in each of their last three reports on the economic outlook.  The concern is what ECB could do to stimulate the 19-nation eurozone economy.

ECB President Mario Draghi is expected to acknowledge the worsening outlook after the bank’s policy meeting on Thursday January 24th. Mr. Draghi admitted that recent data had been weaker than expected, although he argued that the eurozone would avoid recession. The ECB president indicated; “At least for some time to come, there’s going to be a continuing uncertainty that changes nature and the cost is lower business and consumer confidence.” JP Morgan projected the first rate rise in December, rather than September. The eurozone economy enjoyed its fastest growth in a decade during 2017, a 2.4% expansion that ECB’s economists expected to see continue through 2018. The World Bank now estimates growth slowed to 1.9% last year and will slip further to 1.6% this year.


The turnaround is due to weaker demand for eurozone exports. Delays at Germany’s key automobile factories forced Europe’s largest economy to the brink of recession in the final six months of last year. Italy may not have avoided that fate, following an increase in borrowing costs as investors worried over the Government’s plans to add to an already large national debt. In France, President Emmanuel Macron is challenged with rolling mass protests aimed at derailing his economic reform plans. In the U.K., Parliament is divided over how to manage the country’s planned divorce from the European Union, two months before the planned depart.


Europe’s economic prospects could improve. A trade deal between the U.S. and China could revive growth, and a smooth Brexit would assist. Unemployment has fallen below 8%, its lowest level in more than a decade, and wages are rising relatively briskly. ECB officials are mindful of the bank’s past tendency to raise interest rates at the wrong time. It increased key rates in 2008 and then again in 2011. In both cases those adjustments were followed by recession. If Europe is heading towards a new downturn, policy makers would be in an uncomfortable position. The ECB has marginal room to cut interest rates further or implement a stimulus program.



The US-China trade dispute has been the major issue for financial markets in Asia.  Stocks have been responding positively to optimism over progress in the US-China trade dispute in 2019.  Following the growth figure’s release last week, the Hang Seng index in Hong Kong was up 0.4 per cent while in China, the CSI 300 of major stocks in Shanghai and Shenzhen was 0.8 per cent higher. The Topix in Tokyo was up 0.7 per cent with all market segments in positive territory while in Sydney the S&P/ASX 200 gained 0.2 per cent with the mining segment slipping into negative territory.  These market moves came after official data showed Chinese gross domestic product growth has slowed for three consecutive quarters, with GDP growth of 6.4 per cent in Q4, the lowest since the global financial crisis. For the calendar year, growth was 6.6 per cent, a reduction from 6.8 per cent in 2017 but an improvement of China’s government target of 6.5 per cent annual growth. 


Emerging Markets

Investors are gradually re-entering emerging markets equities, hoping to benefit from the recent gains after a poor year dominated by political crises. EM funds attracted US$3.3 billion for the week ending January 18th 2019, according to EPFR Global data, the asset class 14th straight week of inflows. The total flows to the asset class over the past three months has been $27.5bn, reversing periods of large outflows seen throughout the year, a strong start to 2018 meant overall flows for the full year exceed $27.8bn. The index has recovered 8 per cent since its October low.

Emerging Markets are attractive due to relatively poor performance in recent years and uncertainty in developed markets such as the US. Emerging markets have been relatively cheaper, presenting good entry points. Expectations the Federal Reserve will slow US interest rate increases will also make EMs more attractive. Higher interest rates in the developed markets typically results in the yields offered by apparently riskier Emerging Markets less attractive. Fiscal policies in emerging markets are better than many developed markets. There are more emerging markets countries growing at 3 per cent or more compared to the developed markets.


Regional Economies

In January, NCB Financial Group (NCB) offered US$2.79 per share in a takeover bid for insurance conglomerate Guardian Holdings Group (GHL). If the offer is successful, NCB will acquire an additional 32% of GHL for a total sum of US$ 207 million - much needed USD liquidity for domestic investors. NCB already owns 29.99% of the company.


Petrotrin's former workers received TT$ 2.419 billion in backpay from the Government on January 15, 2019. The company’s bond that is due in August 2019 trades around 16.7% due to the uncertainty surrounding the future operations of the company and its ability to repay outstanding debt.  Bond traders anticipate that the Government of Trinidad and Tobago will be able to refinance the US$ 850 million maturity through one or a number of options including; (i) government guarantee, (ii) government on-lending to Petrotrin, (iii) forward sale of oil production, and/or a combination of bank debt and capital market issue. S&P rating agency on January 17th, 2019 mentioned in its report that it sees "a very high likelihood that its owner, T&T would provide timely and sufficient extraordinary support."  Last November, Trinidad’s finance minister, Hon. Colm Imbert, announced the hiring of a group of local and international banks to work on the refinancing of Petrotrin debt and that the Government had provided guarantees for new bank debt extended to Petrotrin.



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