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NAFTA deal too risky for EMs, Asian bonds

NAFTA deal too risky for EMs, Asian bonds

Despite the positive outlook for emerging markets (EMs) in 2018, there are some risks to the region, says Craig Burelle, macro strategies research analyst from Loomis Sayles.

The trajectory of Europe, Japan and US (G3) central bank interest rates and lingering geopolitical events are a source of apprehension for EM investors.

Burelle said a poorly signalled change in the pace of removal of accommodative monetary policies by the G3 would have a negative impact on most EM assets

‘US trade policy, especially the North American Free Trade Agreement (NAFTA), is going to be at the forefront of issues in the first quarter of 2018 and, depending on the outcome, could have significant impact on Latin America,’ he added.

Similarly, Citywire + rated Rajeev De Mello, head of Asian fixed income at Schroders also said NAFTA could pose a risk towards trade relations between the Asian markets and the non-Asian markets.

He said trade negotiations under the Trump administration have been less concerning than initially feared.

‘However, we have kept the risk of protectionism high on our radar. The NAFTA negotiations have stalled and the US administration could impose more trade sanctions on China or even threaten to withdraw from the World Trade Organisation framework.

‘Asian countries are heavily involved in global trade and would suffer significantly if growth were to weaken.’

EM countries, for instance, face a heavy 2018 election calendar and among those with a potential large impact for EM debt are Mexico and Brazil.

‘The electoral campaign in Mexico starts at the same time NAFTA negotiations should be close to concluding. This combination of events could be negative for investor sentiment,’ Burelle added.

Although Turkey and South Africa have no official elections in the year, they are facing political risks that could also weigh on demand.

For currencies, Schroder’s broad view is that the US dollar will continue its weakening trend which started in early 2017.

‘Stronger global growth is often not favourable to the dollar as US investors deploy their capital to international markets.

‘As other advanced economies catch up with the US, their expected investment returns rise on a relative basis,’ De Mello explained.

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