Emerging markets’ resilience to continue in 2018: HSBC

Emerging markets are expected to continue their resilience in 2018 according to HSBC’s Emerging Markets and Asian FX Research Managing Director Paul Mackel. 

Mackel, who leads HSBC’s Emerging Markets and Asian FX research teams from Hong Kong, was in Sri Lanka recently and shared some key insights in a brief interview with the Daily FT. 

HSBC’s Emerging Markets and Asia FX research team ranks highly in investor surveys and is regarded for its comprehensive analysis of EM currencies. Paul joined HSBC in June 2006 and has been a currency analyst since 2000. Prior to joining HSBC, he worked in similar roles for other financial institutions in London and Frankfurt, covering major and Central European currencies. 

Paul is a regular contributor to HSBC’s FX strategy publications and appears regularly in the media. Originally from Canada, Paul studied at the London School of Economics and the University of Edinburgh.

Following are excerpts.

Q:  How did emerging markets in Asia perform in 2017 and what is the outlook for 2018?

A: Emerging markets were resilient in 2017. EM growth was recovering, local bonds were fairly strong, EM currencies rallied with a weak USD and EM corporate earnings expectations were strong. 2017 was a healthy year for EM. Will 2018 be the same? We remain positive. Not everything is great in Emerging Markets and a lot of things have already performed well in 2017. Nonetheless, we expect EM currencies to stay strong versus the USD, if not even a little stronger.

Q: Any thoughts on SL Rupee’s prospects in 2018?

A: The LKR will probably continue to depreciate in 2018 as there is little sign that the persistent twin deficits (fiscal and current account) can narrow meaningfully. Gradual LKR depreciation was the path in 2017 and we expect the same in 2018. We expect USD-LKR ending 2018 at 158.

Q: What are the key challenges/risks for emerging market currencies in 2018?

A: EM currencies have rallied strongly this year. Overall, this is consistent with our baseline thinking for 2018 – the global economic synchronisation is set to continue, which is supportive for most EM currencies. Nonetheless, we still need to consider what could spoil the mood. Although not our baseline scenarios, there are a few possibilities to consider, including concerns over a quick rise in inflation (and, as such, higher core bond yields, as well as EM central bank tightening risks); US trade protectionism; and certain EM central banks resisting local currency appreciation more aggressively.

Q: What are the key challenges/risks for the global FX market?

A: The risks are the same for those that could impact EM currencies. But really it comes down to whether the USD suddenly becomes very strong again, potentially caused by the Fed needing to move faster on rate hikes. This would likely create a lot of volatility across markets.

Q: What should Sri Lankan corporates consider when managing their FX?

A: There are multiple considerations for corporates when managing their FX risks. Corporates need to consider the uncertainties in the global economy and time horizons. FX volatility can suddenly rise and corporates need to consider different scenarios to protect themselves.