Head - EMEA Investment Strategy
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The largest economies of Central & Eastern Europe, the Middle East and Africa face big economic challenges ahead. We do not see their financial markets as offering an entry-point for now.
The largest Central & Eastern Europe, Middle East, and Africa (CEEMEA) economies of Russia, Turkey and South Africa are facing major economic challenges over the coming months. This makes us cautious about these nations’ investment prospects even after the recent weakness. The Middle East also faces strain from the collapse in oil prices and pressures on regional currency pegs.
Admittedly, the outlook had somewhat improved in 2019. However, unorthodox policymaking for several years prior to the COVID-19 crisis – particularly in Turkey and South Africa – has created economic fragility that will be severely tested in the months ahead.
The region is characterised by a dangerous mix of vulnerabilities. Its current account deficits may worsen as exports weaken sharply. Its budget deficits may deteriorate as tax revenues decline. Its US dollar denominated debt may be difficult to service as the dollar stays firm. It is has commodity export exposure at a time when demand weakness is expected to keep prices under pressure. In addition, for Russia, Turkey, and South Africa, the medical challenge of COVID-19 is mounting and their healthcare systems face pressure.
In emerging markets, it is often the currencies that first reflect the outlook. It is therefore unsurprising that the YTD performances of the South African rand, Russian ruble, and Turkish lira are amongst the worst in the emerging market universe. This is not indicating an oversold entry level for these currencies, nor for these countries’ equities and bonds, as a tough period lies ahead.
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