Summary

  • WHAT: On-the-Record Wall Street Briefing Series

  • WHEN: Wednesday, February 19, 2020; 3:00 p.m.

  • WHERE: 799 UN Plaza, 10th Floor, NY, NY 10017 (SW Corner of East 45th Street and 1st Avenue)

  • BACKGROUND: This briefing is part of a series organized annually by the New York Foreign Press Center to give the foreign media access to Wall Street experts.  There are several briefings scheduled in this series and we ask that interested journalists RSVP to each briefing once the media advisory announcing each event is released. 

    Mr. Oganes provided an emerging markets macro market outlook for 2020. 

NEW YORK FOREIGN PRESS CENTER, 799 UNITED NATIONS PLAZA, 10TH FLOOR

MODERATOR:  So good afternoon.  Welcome to everyone in the room and to those of you connecting in Washington, D.C., at the Foreign Press Center via digital video conference.  We’re very pleased to have Mr. Luis Oganes here today.  He is the head of currencies, commodities, and emerging markets at JP Morgan.  I’ll turn the program over to him in just a moment, but first I have a few housekeeping items.  If you could please silence your cell phones, and at the conclusion of his remarks we’ll open the floor to questions; I’d ask that you wait for the microphone before stating your name and your media affiliation as a courtesy.  And as a reminder, today’s briefing is on the record.  And then finally, Dr. Oganes’s views are his own and don’t represent those of the U.S. Government.

And with that, let me turn over the podium to him.

MR OGANES:  Thanks, Daphne.  Good afternoon, everyone.  Pleasure to be here and to share with you some of the things that we are monitoring in our team.  Just as a matter of introduction, my name again, Luis Oganes.  I run three research teams at JP Morgan.  One is emerging markets, the other one is commodities, and the other one is global currencies.  The three, obviously, are asset classes that are quite intertwined.  We work very closely with our global economists just tracking the whole world, and work closely also with our equity colleagues or credit markets.  So JP Morgan is – takes quite a bit of pride in having research teams covering most markets and geographies.  So I’m part of that machinery.

What I would like to do today is share with you some of the key things that we monitor – we’ve been monitoring in emerging markets, but try to put it in the global context of what has been happening in the world.  And I think that before getting to the current environment, I think it’s useful to recap what happened in the market and the global economy last year, because that would help frame some of the things that we’re monitoring and that are happening this year.

Last year we had a situation where, as you may recall, for basically the first three quarters of the year, from the first to the third quarter, we were all getting very nervous about what we called a synchronized global deceleration.  It was developed market economies and emerging market economies, they were both decelerating from much stronger growth.  In the case of emerging markets itself, growth in the full year 2019 ended up at around 4 percent.  The previous year was 4.8 percent, so it was almost like a 1 percent growth deceleration year on year for emerging markets.  Part of it was China, but part of it was disappointment pretty much everywhere.  Obviously, the rest of Asia is quite linked to China so it saw some deceleration, but there was massive disappointments in Latin America and some countries in what we call EEMEA, Eastern Europe, Middle East, and Africa.

The U.S., as you know, was coming also from very strong growth the year prior, 2019.  That is when the tax cuts that were introduced by the Trump administration kicked in that generated quite a bit of impulse, fiscal impulse into the U.S. economy.  And the U.S. economy itself was decelerating last year.  However, it was still – the U.S. economy was still in terms of the pace of growth, even though it was moderating from a peak of around 4 percent that we saw in the middle, second quarter of 2018, it was still in the developed world seen as the outperformer of growth at a time when Europe was disappointing.  Same thing with the Japanese economy.  And that is why we kept talking for most of the year about the situation of U.S. exceptionalism.  So the U.S. ended up being kind of in its own dynamics, decelerating but yet outperforming growth in the developed world, emerging markets disappointing pretty much everywhere, and in the kind of environment because of this sense of U.S. exceptionalism we had a dynamic of a very strong U.S. dollar.

So the U.S. dollar was basically king, and that meant that currencies, both developed market currencies and emerging market currencies that traded against the dollar, were under pressure for most of the year.

This kind of dynamic of global growth disappointment, deceleration, started to change in the fourth quarter of last year.  So we started to see some initial signs of the global economy reaching some kind of bottom and started to recover, and which of course led to a lot of excitement that finally we’re going – this synchronized deceleration was reaching an end and we would start a more balanced recovery.  The U.S. no longer was the exception.  Other regions started to recover.

So that was the tone with which we closed 2019, with expectations that the global growth dynamics was starting to look better, all the talk that is the U.S. economy going to go into recession in 2020 – basically that talk disappeared from the market and most of the discussion was what is going to be the magnitude of the recovery.

So that was the sentiment, and if you look at our year ahead outlooks, across asset classes pretty much in most asset classes you had a tone that was rather constructive that 2020 would be a better year than what 2019 was.

Now, before starting to talk about 2020, let me just recap.  So on the growth side, it was disappointment and then for three quarters and then some sign of stabilization and some modest recovery.  What led to that disappointment?  Clearly, while there were a number of factors, but probably one of the most important ones were the trade tensions that dominated many parts of the world, right.  Remember that it was not only U.S. versus China, there was also the renegotiation of the North America Free Trade Agreement, USMCA that was only approved this year, so we spent the entirety of last year not knowing what will happen there.  There were obviously trade renegotiations between the U.S. and Korea, between the U.S. and Japan.  There’s still some pending issues between the U.S. and Europe.

So basically this uncertainty that was generated by these trade tensions did hit manufacturing, hit investment, hit CapEx, so companies not knowing whether there was going to be a framework to trade without tariffs basically halted investment.  That was the reality of it.  So it was – so the hit, the direct hit from trade tensions was a rather modest one; that indirect hit coming through the expectations channel, through the business confidence channel, that was a lot more important, and we saw investment, CapEx, manufacturing all going down around the world.

This is what started to stabilize towards the fourth quarter, and that is when we started to see manufacturing around the world starting to turn the corner, and that is why we closed the year in a more positive tone.

The other factor that obviously helped the market, even though you would say everything that I mentioned you would have thought, okay, it would have been a bad year for the market – equity market should have been lower and yields in local currency bonds for emerging markets or local currencies themselves should have been under much pressure – but the one thing that came to save the day was, first and foremost, the Fed.  The Fed decided after having hiked four times in 2018, decided basically to cut four times in 2019.  That was something that was not expected when we closed 2018, and that was a surprise for the market that really started to support markets.  Obviously, the moment that the Fed started to cut rates, to the extent that – for the most part around the world, inflation is not much of a problem – central banks around the world follow the Fed.  Certainly in EM countries, I would say that most of the EM central banks started to follow the Fed doing its own – doing their own doses of monetary easing.

So again, fundamentals were pointing south but the policy support coming from monetary policy was what saved the day, and you actually had in markets some of the strong – 2019 is going to be remembered in history as one of the strongest years for emerging markets.  You had equity and fixed income markets, be it in hard currency or in local currency, delivering returns of between 13 and 15 percent for the full year.  And you would think why – how did that happen?  How could that happen if growth was decelerating?  Markets are meant to be a reading on growth, and so last year was the exception, and the exception actually was produced by the support coming from central banks.

So that’s the narrative, that’s the story of last year.  So we started this year, again, feeling better.  You may see the first week of the market – the first week of the year in January, the market rally basically continued.  And only the second week or the middle of January when we started to hear all these news about the coronavirus and the uncertainty that that led – that that generated, that’s when we started to once again question whether this shock could actually derail this more constructive, optimistic view about the global economy.  Since then, well, we have had obviously more information, we know – you follow probably a lot more closer than we do all the statistics of how this virus has been extending.  The part that I think markets are still trying to grapple is the intensity of the damage to growth not only in China, but because China is such an important economy in the world these days, the impact to the rest of the world, and we’re still having to deal with the question of uncertainty.

So our own economists were forced to downgrade, do downward revisions to growth a couple times already since this episode has started.  One was done at the end of January and one was done two weeks ago, so in the middle of February.  At this stage, I told you that last year we closed EM growth with 4 percent.  We started this year thinking that EM growth, emerging market growth, was going to rebound to 4.9 percent.  We have trimmed that forecast; we’re now at 3.8, so – 3.8, 3.9 – so basically, it’s like 30 basis points below what we were expecting.  Still modest.

In the case of China, the revision has been a little bit higher.  It’s – we started the year expecting growth this year for China, full-year growth, at 5.9 percent.  Now we’re at 5.5 – sorry, 5.4, so half a point less.  And in all these scenarios, we’re still pretty much penciling in what we will call a V-shape recovery, meaning that all the hit would only happen in the first quarter, and in the second quarter, you would start to see a rather strong recovery, right.

Obviously, the Chinese administration has adopted some policy support, they’ve been cutting reserve requirements, they’ve been cutting interest rates, they’ve been announcing some fiscal stimulus in order to support at least the businesses, the sectors that are the most affected.  But that is, obviously, in this kind of environment where there’s a health issue, a health crisis, there’s so much that spending money can do or cutting rates can do if people cannot go back to work.  So that is – that’s why there’s still an open question as to whether these new estimates are going to apply, or whether we’re going to need to do further downward revisions.  So we’re just waiting to see more data.

So I would say that it is probably fair to say that the risks for these growth forecasts are still on the downside and in the coming weeks we may be – when more hard data comes out, we may be forced to pursue further downgrades.

When we go around to speak to investors – I’m based in London now.  We just had a big conference at JP Morgan in London for emerging markets yesterday and – or when we visit clients in Europe or in other parts of the world, we do get the sense that people – the market is probably still expecting a V-shape recovery, meaning that we will all get the hit in the first quarter and we will have a very strong rebound in the second quarter.  So – which you can say, well, because we don’t know really.  There is an element of complacency and the market may need to basically adjust in order to incorporate or discount.  Maybe instead of a U-shape – a V-shape recovery, maybe it’s a U-shape recovery, meaning that we don’t rebound just yet in the second quarter; maybe we still stay with a very modest growth in the second quarter still, and maybe the recovery comes only in the third quarter.  So this is the kind of debate that is taking place right now and that is why we are, obviously, monitoring things.  And I can tell you that chances are that we are going to be forced to do further downgrades.

Now, how are – what is the policy response?  Of course, governments, central banks are not staying idle given this uncertainty.  I think at this stage everyone is recognizing that there’s a need for more policy support in order to minimize the impact, the growth impact of this episode.  As I mentioned, China itself has adopted both fiscal and monetary policy steps.  I would say that in the grand scheme of things, there is a still rather modest policy response and I will say that if the hit is larger, we could expect even more announcements from the Chinese administration in terms of more policy, more supportive policies.  So I don’t think that probably the story is not over yet.

What we’re seeing in the rest of Asia and other countries, I think we may see it in other countries around the world, is that to the extent that inflation doesn’t – is not yet a global problem, we may see central banks cutting rates, interest rates further.  China has done it, some countries in Asia have started to do it.  We got already cut in Thailand and we’re basically expecting the rest of Asia, all countries, reluctantly or not, to cut rates further.  We have penciled in more rate cuts in places as far as several countries in Latin America, other expecting cuts in Colombia, expecting cuts in Peru.  There’s a question mark whether Chile will cut given that it’s already very low.  More cuts in – well, Brazil is the one that they just cut last week and they said it was the last one.  Mexico will probably cut more.

So some of this is going to be probably insurance for the hit, because remember that China affects through supply chains the rest of Asia, but it affects many countries around the world that are commodity exporters.  For countries like Chile, for like Peru, like Brazil, China is the number-one export destination.  So this growth deceleration there, declining demand for commodities, less manufacturing, less production, obviously hurts – hits exports of these economies and that’s why they need to provide more policy support.  So this is what we’re expecting right now.

The Fed, obviously – our economies, for the record, they do have one additional cut in their forecast in the month of June not necessarily for cyclical reasons.  Their cut in the forecast is because of the expectation that, I believe in the month of April, the Fed is going to be announcing a new framework for monetary policy in which – instead of having a yearly inflation target, it’s going to be a multi-year average target.  And since inflation has been below the 2 percent target for some – for a few years, it means that the Fed is going to be able to tolerate higher inflation in the subsequent years and that may allow more room for the Fed to do another cut.

Maybe because of what is going on with the coronavirus that increases actually the argument for the Fed to cut once more.  The market is, obviously, not completely discounting this.  There’s some only partial discounting for a potential cut this year, but it’s still not fully discounting that.  So that is the one thing to watch, but as I said, we do expect many other central banks, particularly in emerging market economies around the world, to cut further.

There is an open question as to what happens in Europe.  Europe, I will say probably during this year of trade tensions, the one region that probably was affected maybe in a disproportionate way was actually Europe.  Europe is – the Eurozone is quite an open block, relies a lot on exports in order to grow, and maybe the U.S.-China trade tensions more than affecting U.S. or the Chinese economy, maybe affected Europe.  So Europe, in the end, ended up being one of the biggest casualties of this uncertainty in a way, and that probably explains beyond some specific reasons why the Eurozone disappointed in growth so much, particularly Germany which is so reliant on exports.

And now that we have this coronavirus episode in which supply chains are being disrupted, where manufacturing is being disrupted, where there’s going to be by definition less trade for some time, there is a possibility that this, once again, comes to hit the European economy, and this is why you’re seeing the euro as a currency reaching lows that we haven’t seen for a few years and our FX strategists are thinking that maybe there’s more weakness in the euro as a currency in store given the vulnerability of the region to – how leveraged the region is to global trade and, in general, to global growth.

And one final point to mention that markets, obviously, are – still need to grapple with is in terms of uncertainty.  Beyond the timing of the recovery from the coronavirus, another development that markets are following is, obviously, what happens in this country in terms of the elections.  And this is something that – we all talk about it, but I don’t think that the market is positioned one way or the other.  And I think that surprises during the campaign – there’s already some warning flags about whether it’s going to be a very competitive race and whether that can generate uncertainty as to what the policies could be in the next U.S. administration – any changes in taxation, any changes in trade, any changes in domestic policies.  This is another thing that I think, even though in emerging markets presumably where we’re more removed, we’re going to need to follow quite closely just because markets, in the end, are very integrated.  And if anything happens that generates a correction in U.S. equities, or in global equities in general, you will get this situation, what we call risk of environment that in the end – emerging markets is still considered a risky asset class, and whenever there’s a risk of globally emerging market, assets tend to suffer.  Currencies, rates, the spreads on external data, et cetera.  So that’s something for us to watch as well.

So to close my initial remarks and take some of your questions, I can – I haven’t discussed individual countries, but happy to try to answer your questions if you have them.

We are in a – again, we’re in a waiting period, trying to incorporate whatever additional information we have in order to fine tune our projections.  We are – markets – I think that the reason why markets in general are not panicking is that this kind of health scares, we have seen several in recent history.  Historically, obviously, it’s sad for those affected.  But for markets, interestingly enough, these health scares have usually ended up being quote/unquote “buying opportunities,” because eventually the economies do recover, and markets do recover.

So a lot of the psychology of the investors, even though we are concerned about how bad the situation can get or when is the bottom, et cetera, is that no one wants to be making a huge bet against the market or getting overly negative.

You’re not seeing – I mean, we’re still reaching obviously historical heights in U.S. and European equities.  And even though there’s more volatility in emerging markets, you’re not seeing a massive correction.  Why?  Because people know you don’t want to be caught short if one of these days there is a clear headline saying that whatever – we’re starting to see clear indication that the contagion rate has diminished, or we have a clear indication that the growth is starting to recover.  We have more statistics that economic activity, manufacturing, et cetera is coming back to normal in China.  We can get a headline of a vaccination being discovered all of a sudden and that it is being globally distributed.  Any such headline, as you can imagine, would most likely in this kind of environment lead to a massive market rally, and no one wants to be caught short or massively positioned in a negative way into such an episode, and that is, in a way, what is sustaining markets.

But – so the counterargument, obviously, is that maybe because of that, there is this element of complacency, that markets maybe are not fully assessing the risk.  We’re operating still in a vacuum, and we just need to keep monitoring the situation to see the extent, the depth of the damage to global growth and the extent of the – of such damage and when the recovery can  happen.

So if we were to talk again probably in a few weeks, maybe I’ll be having with you – sharing with you some different numbers, most likely lower.  But again, that’s where things stand.

Let me stop there and maybe take questions.  Thank you.

MODERATOR:  Let’s go across the room first to Niki.

QUESTION:  Thank you.  I’m Niki from Indo-Asian News Service.  Three threads were clear in your talk:  coronavirus, supply chains, and the downgrades generally.  Is that possible for you to thread these three themes and comment on the Indian market in specific terms?  Is it possible?

MR OGANES:  Well, what I can tell you is India is geographically close to China, but I understand that there is a lot of steps that are being taken to prevent a massive contagion.  We’re seeing this across Asia, right, so the risk I guess is there.

But India can – so one of the results of this episode is that because China is growing less and demanding less, producing less temporarily, there is less demand for commodities, and commodity prices have declined.  All the prices have declined.  So some countries that are net oil importers, including India – and I put there Turkey as another example, and South Africa – actually do face a positive in terms of trade shock.  So there is something quote/unquote “good” coming out of this bad situation, and so there is some temporary relief.  But so there’s maybe something positive for a period of time.

I would say that the economic link, however, between India and China is still rather modest.  So when we talk about the beta of growth of – if China’s growth declines by half a point or one full point, how much that affects other parts of the world, India is not topping the charts in terms of that beta.  Topping the charts, actually, is countries that are – the rest of Asia that are quite linked to supply chains are, obviously, much more on the front lines of that negative impact.  But even countries in Latin America that are exporting commodities to China are also on the front line of that impact.

So I would say that, in a way, I don’t think that India is the biggest quote/unquote “casualty” of this episode, and I think that Indian markets are probably going to be trading more on domestic dynamics, domestic factors rather than on what we’re discussing here about the global shock – coronavirus shock and the impact on global growth.

Even before this episode, obviously, there’s been a deceleration threatening the Indian economy, but this has nothing to do with coronavirus.  So I think that, again, I would say domestic issues are more relevant to understand the dynamics of Indian markets and the Indian economy these days than this global shock.  If anything, there’s something positive coming from lower oil prices, which India imports.

Yes.

QUESTION:  Thank you.  My name is Manik Mehta.  I’m a syndicated journalist.  Your comments were very interesting I must say.  However, I missed one factor which is contributing even more to the uncertainty, particularly in Europe, and that is the Brexit factor.  Would you like to comment on that and its repercussions for economies in the EU?  Thank you.

MR OGANES:  Thanks.  Thanks for your question.  So we still see Brexit – I mean, most of my comments have been for the global economy.  Brexit is still seen as a rather regional risk factor, that is applies mostly to Europe as opposed to having global repercussions.  Maybe this is a simplistic view, but – so I would say that part of the growth disappointments in Europe last year – I mentioned that Europe was the main maybe casualty of the trade tensions, but I would say when I say “trade tensions,” it was quite broadly.  I would put Brexit within that, because part of that trade uncertainty is what is going to be the next trade relationship between the UK and the EU.  And this is something that – well, we’re obviously all watching to see exactly what kind of arrangement and agreement is reached this year.

There’s a deadline to reach some kind of agreement by the end of the year.  If it’s not reached, there is the possibility that there is a no-deal Brexit January 1st next year, which would obviously be quite damaging, certainly for the British economy, but also for several countries within the EU, some of which are quite – have a very strong bilateral relationship with the UK.  Ireland is, obviously, topping the charts, but France is quite as close as well.  Northern Europe and the whole – I mean, it would – I already told you there’s some challenges for Europe overall.  We’re seeing growth disappointments.  We’re seeing the EU under pressure.  I think that Brexit would just add insult to injury in terms of generating another source of uncertainty.

But again, I would not put that as a big issue for the global economy beyond the contribution of Europe, which is maybe one-fourth or one-fifth of the global economy.  So that’s why I didn’t mention it on my initial remarks.  But that, obviously, is something that we are watching.  And unfortunately, the market is still also debating there exactly what to expect.

Our own economists are warning that if you have to establish a probability of no-deal Brexit, the probability is clearly not zero, given the difficulty of reaching an agreement, right.  And it’s hard to quantify the probability.  I’ve seen numbers in 20 percent, 30 percent – who knows?  But clearly not zero.  And 20 percent, 30 percent is not a low probability.  And you see – we’re starting to see the rhetoric, the opening remarks on both sides, from the UK and those coming out of Brussels.  Obviously, the opening statements are quite – by definition, as part of the negotiation strategy, trying to establish a very high bar.  So that is going to be a tough one, and I think that we’re all going to be forced to watch that one carefully and see whether we can actually get an agreement by year end.  So to be seen.

QUESTION:  Arnaud Leparmentier, French daily Le Monde.  What is your assessment of a risk of U.S.-Europe trade war by the next presidential election?  And what is your assessment of the evolution of dollar?  Do you think it’s stabilized, or will it still go up?

MR OGANES:  So I think that part of the reasons why we got to the point – it was a rollercoaster, 2019 was a rollercoaster in the U.S.-China trade negotiations, right?  We started – you remember I think it was in May where there was almost an agreement to be signed, all of a sudden to fall apart.  In June, there were no more tariffs announced.  In September, there were more tariffs announced and the situation kept escalating, only for – in the year end to all of a sudden once again reach an agreement, we have this phase one, right?  Maybe much more modest than what was being discussed before, at least the specter of additional tariffs diminished.

I think that you have to understand an agreement like that as having some kind of political calculation behind them on both sides.  And this – and I think on the U.S. side, the U.S. election has to be part of it, because there was clearly a growth impact and a market impact – market uncertainty and the stuff that I mentioned before, CapEx declining.  So at a time when the U.S. had cut taxes, there was an expectation that investment would be much stronger, much more sustained.  But because of the trade war, investment was faltering, as in the rest of the world.  So in a way, the U.S. was not benefitting, was not generating the momentum in investment and in CapEx and in manufacturing that you would have expected from tax cuts because of the trade uncertainty.  And I think that that probably ended up being part of the calculus for the U.S. willingness to reach an agreement with China.  And China, I’m sure it was a little bit of the same.  China growth was being impacted by these trade tensions, so in a way there was an – a political imperative from both sides to reach some kind of compromise, and I think that that is probably what motivated phase one.

Never say never.  Can we see a new trade war front starting between the U.S. and Europe?  Certainly, there are issues that need to be addressed there.  But I think that the Eurozone, as I told you already, is facing already challenges for growth.  And the U.S. – well, I think that President Trump probably can ill afford to have a big shock to growth once again ahead of the election.  So if I had to guess – and this is obviously my personal view – is that we want – we may not see it – we may not see anything this year.  This doesn’t mean that it won’t happen in the future.  But I think that we may – I think it’s – we’re basically not expecting a formal trade confrontation.

If anything, there is actually talk of the opposite.  There is some discussion that the UK, as you know, now that it will be free, once it reaches an agreement with EU to sign free trade agreement with other countries, including the U.S., there is some talk that actually the EU may get ahead of the UK in negotiating a trade relationship with the U.S.

So again, these are all comments from various people.  Nothing formally is – has been started.  I think that trade will diminish in terms of being a source of risk for markets in this year just because of the U.S. elections.  But can they be – resurface or come with some intensity in the coming years?  It certainly is possible.

MODERATOR:  We’re going to take —

MR OGANES:  Oh, and by the way – and the dollar, during this coronavirus episode, this sense of U.S. exceptionalism once again is on the table.  And the dollar is probably going to be still be maintained with some appreciation pressure.  This is part of the flight-to-quality.  This is part of – so the euro is – has been depreciating, partly because of the question marks on European growth.  Emerging market currencies are depreciating because of the fear of the growth impact from the coronavirus, the deceleration of China, the declining commodity prices.

So in this kind of environment, I think that the dollar is probably going to remain strong.  There is the possibility that once you start to see the rebound – whether it happens in the second quarter or happens in the third quarter – that that once again starts to fade, the appreciation pressure on the dollar, and that you see other currencies rebounding.  But again, you need to see more balanced global growth for the dollar to lose momentum.  And while this coronavirus episode is still going on, it’s hard to see that.

MODERATOR:  Okay, let’s go to Washington, D.C.

QUESTION:  Anton Chudakov, TASS News Agency of Russia.  Thank you for doing this.  Thank you for such interesting briefing.  I have just two short questions.  Do you have any estimates of the sanctions’ impact on the Russian economy this year and in general?  Also how you assess the way Russian Government deals with it.

And second:  As U.S. Secretary of State Mike Pompeo said the United States is willing and able to provide Belarus with 100 percent of its oil and gas.  How could you assess this possibility, especially in terms of capacity and economic impact in your opinion?  Thank you.

MR OGANES:  Sorry, can you repeat your second question?

QUESTION:  U.S. Secretary Mike Pompeo said the United States is willing and able to provide Belarus with 100 percent of its oil and gas.  How could you assess this possibility, especially in terms of capacity and economic impact in your opinion?

MR OGANES:  Okay.  Well, the first question related to sanctions.  So if you look at what has been the economic management in Russia, okay, both fiscal and monetary policy, I would say that the market participants recognize that it’s being very conservative and responsible.  It has had this aura that despite all the political constraints, both fiscal and monetary policy have acted in a rather independent way, and this has generated, obviously, quite a bit of appetite for Russian assets.  But of course, the risk of sanctions have always been there and deterred some investors from taking exposure to Russia out of fear of, obviously, being caught long and losing money on the trade.

So, in a way, there’s been this disconnect between Russian fundamentals and what we would expect to be where the currencies is or where interest rates are or where sovereign debt spreads are or where equity markets are versus what they should be if the risk of sanctions were not there.

Every time that we go to Washington, we do trips to Washington every maybe four to six weeks and meet with the various actors of government, we always try to get a sense – we obviously don’t know any more than you do of what is cooking on the sanctions front.  I would say that many investors that are kind of – there’s something that’s called sanctions fatigue, like, you’re afraid of taking exposure because you don’t want to be caught along during sanctions, but in the end the sanctions don’t happen, or more sanctions don’t happen, and you missed out on a trade.

So I would say that, at this stage, we have seen a lot of appetite for Russian bonds and Russian equities from market participants.  There’s – in the end there is the realization that sanctions is something that can happen.  It is a political development.  It’s most likely going to be – if they happen, it’s something that it will be more a decision of the U.S. Congress rather than the Executive.  But again, it’s an open question.  I cannot even provide a probability.  I think that what matters a lot for investors right now is that at least you still have this sense that our technocrats are managing the economy both on the fiscal and monetary policy side.  So at least there is some anchor of confidence and credibility coming from the policymaking despite the uncertainty from the geopolitical side or the U.S. sanctions side, which are impossible to predict.

Unfortunately, I’m not in a position to comment on your second question on Belarus just because we don’t cover Belarus.  It doesn’t have assets that we trade in the market, and it doesn’t – it’s not in our list of countries that we cover.  So I apologize.

MODERATOR:  Back to New York.

QUESTION:  I’m Tim Schaefer.  I’m with German newspaper Euro am Sonntag.  I have a question in regards to opportunities given the anxiety and worries.  Where do you see the best chances for a rebound worldwide?  Where’s a good point to invest?

MR OGANES:  You’re talking about economics or markets?

QUESTION:  Markets.

MR OGANES:  Yeah.  Well, equity markets, as you know, U.S. and European equities continue to reach historical highs, so I think that there are good reasons for that in terms of companies in general still being rather cash-rich.  A lot of them are still either paying – in a position to pay high dividends or – so the profit cycle is – has not been exhausted.  Profit growth is still enough to allow companies to – a lot of them are doing share buybacks and a lot of them are paying high dividends, and that is what is keeping the equity market close to historical highs or at historical highs despite everything we’ve been discussing in the past 30 minutes, right, and all the sources of uncertainty.

I would say that the things to watch are the turning point in the coronavirus episode, I think that it can lead to a big rebound in EM equities, emerging market equities.  Emerging market equities ended up, for most of last year when growth was declining, obviously was – were under pressure.  In the fourth quarter, when growth started to stabilize, you saw a big rebound in EM equities, only to once again be hurt by the coronavirus and the fear of a hit from China to EM growth.  Once this uncertainty is dissipated, once we start to see the signs of the turnaround and the rebound in China, my guess is that we’re going to see a huge rebound in EM equities.

So the problem obviously is in – well, how to time it, and as usual, given that no one has a very sharp crystal ball, you may want to maybe do it in a gradual fashion, saving some ammunition to basically buy the dip.  In the case of – this is in – in the equity side – on the fixing common currency side, to the extent that EM central banks are still cutting rates right and left – and we think that actually because of the coronavirus episode they’re going to cut more interest rates – we’re still favoring, recommending investors to buy local currency bonds.  They have to hedge the currency risk, however, because of what I mentioned before, that the dollar is most likely to remain strong while the coronavirus episode is still not – we’re not seeing the light at the end of the tunnel.  But I think that you can be low on the rates, having some at least partial hedge in the – on the currency side,  and just remove the hedge once again when you see the signs of a recovery.  Because I think that at that time, also, the dollar strength may start to fade, and we may see a rebound in EM currencies.

So again, we don’t know whether that’s going to happen in the second quarter.  We don’t know whether it’s going to happen in the second half.  But some time in between – so I think that the next few months are actually going to be very interesting for markets.  There will be a moment to enter EM currencies and to enter EM equities.  I cannot tell you it’s right this minute just because of all these uncertainties, but I think that – and this is, I think, is the mindset of investors.  That’s what I was mentioning before, that there is this element of quote un-quote “complacency” because no one wants to be caught mega short into something that can turn around very fast.

QUESTION:  Thank you.  Malick Kane from AFRIG Mag.  I wanted to ask a question related to the debate over the new currency in West Africa, where 15 countries are trying to remove the franc CFA, the – which is a colonial currency – and implement a new one.  And there are some economic and monetary risks.  Can you talk about changing a new currency, how and what are the strategies, technically, we can use to stabilize the market and the economy in West Africa?

MR OGANES:  Well, what I can tell you on that front is that – I mean, I understand the arguments.  What is interesting – everything that I hear about the reasons to get out of the CFA or – is – tends to be more political than technical, right.  And it is like giving up the last bastion of colonialism, and why do we need to link our currency to the Euro, and there will be (inaudible) respect to the French franc, rather than technical.  Obviously it’s a sovereign, independent decision.  Any countries decide to pursue it, they’re free to do so.

What I would tell you, though, is that there is a trade-off, and there’s a huge trade-off, that the moment that countries migrate to having their own currencies – well, the macro policy setup needs to – it’s going to come into focus.  And the viability of and the willingness of the populations to save in new currency, to hold a new currency, is going to depend on rather responsible fiscal and monetary policies.  That monetary policy that central banks can be – can act independently to fight inflation, to reduce FX volatility, and on the fiscal side, that there is no big spending.

Unfortunately – and this is not only West Africa but Sub-Saharan Africa in general – we have seen – we are – this is a very interesting time period in their economic history, because we’re seeing Sub-Saharan Africa getting increasingly more integrated into the global economy.  A lot of that is obviously for their own country merits of having – they’re all growing much higher, much faster than other emerging market economies, and certainly much faster than developed market economies.  But there is the reality that what is pushing investors to buy bonds of Sub-Saharan African countries is the fact that interest rates are so low in the developed world, right.

And we know that, yes, we’re not expecting rate hikes by the Fed or by ECB or BOJ any time soon, but you know that eventually will happen, right.  I don’t know if it’s next year or two years or three years or five years from now, and the time will come when you are actually – all this massive capital influx, all the massive appetite for debt issuance that is happening in Sub-Saharan African these days, the appetite is going to diminish.  So I would say that I think that and I’m hoping that governments realize that this kind of benign external environment, you cannot count of it staying around forever, and that when the tide turns, if you have your own currency, most likely by default it’s going to be under pressure just because there’s going to be less influx or maybe outflux from emerging markets overall.  And at that moment, if the policy setup, fiscal and monetary, is not a sound one, people may realize, “My God, what did we do?” and see massive depreciation of their currency.

So again, I think that countries that decide to take that step in taking matters into their own hands and assuming their responsibility of having their own currency, at least hopefully there will be sufficient understanding of what it entails, right, and that – so economic sovereignty is – can be a poor guide to – this is not only – that’s only maybe a modest part of the whole story.

MODERATOR:  Okay.  So I know we’re running up against the clock.  We’re going to take one question in New York and go to D.C. and then see where we are.

MR OGANES:  Okay.

QUESTION:  Thank you.  Irene Li with China Business Network.  I’m wondering whether your team has done any asset allocation adjustment in response to the coronavirus outbreak.  Thank you.

MR OGANES:  Well, we – we have.  The – so we started the year – as I told you before, we started the year being more constructive of the global economy, thinking that there was going to be better balanced growth, EM growth was going to be recovering, the U.S. exceptionalism story was going to fade, continue to fade, we were expecting the U.S. dollar to weaken, EM FX to appreciate.  So we were all in for let’s buy local currency bonds, yields are still high, but – and let’s be long EM currencies because they’re going to be recovering.  EM currencies, according to all of our models – we have these, like, fair value models and most of them seem, from a pure fundamental point of view, seem cheap.  So EM FX is cheap.

So – but the coronavirus episode, because of the concerns that it generated for not only China growth but the impact on the growth of the rest of the world, that made us take that recommendation off.  So we’re now neutral on currency, so we’re not – we’re not short in – on the aggregate.  We are neutral.  The individual longs and shorts, I think that I distributed – you have a report that we circulated before, so you can see the list of what are – what is in our portfolio.

But our overall strategy is at this stage to be cautious with EM currencies, because we think that, as I said before, the dollar will probably remain strong while this episode is going on.  I think – again, we all recognize that it’s a temporary – the shock eventually will fade, but because we don’t know the timing, it’s hard to say even though currencies – EM currencies are cheap, that’s probably not a sufficient argument to be long, because if this episode lasts longer and it is – the recovery doesn’t happen yet in the second quarter, that we still have the second quarter very choppy growth and only it’s a third quarter rebound.  You can have EM currencies suffer during this period, right.  So I think it’s probably too early to call the bottom here.  So that, I think, is probably the most important change that we have made in our recommendations since the coronavirus episode started.

MODERATOR:  We’re going to go to the question in Washington, D.C.

MR OGANES:  Yeah.

QUESTION:  Hello.  Thank you for taking my question.  I’m Miya Tanaka from Japan’s Kyodo News.  So I have questions on the response to the virus outbreak under the G20 framework.  The G20 finance ministers are going to meet this weekend.  What are the – what are your expectations of this outcome?  And I think you just mentioned about, like, that cutting interest rates wouldn’t be that much effective when people are staying inside during this kind of epidemic crisis.  Is that the same for fiscal actions, like increasing public spending?  Would that not be much helpful in supporting the economy?  Thank you.

MR OGANES:  I think the – so remember what kind of fiscal response we saw in the past whenever there was growth acceleration, right?  It was basically telling banks open once again the gates of credit, start extending credit to more companies and induce companies, particularly state-owned enterprises that are – act on command to invest more, right?  To build more, to – so that’s where there was massive infrastructure spending or more CapEx, more manufacturing, et cetera.

The current shock is a very unique shock, which is basically, people are staying home because of the health concerns.  So deciding to spend more is not going to have the same effect because you’re not going to get more people to work because they can’t, or it’s not wise for them to do so while there’s still this concern.  So I think that fiscal policy, from that perspective – and maybe that is why the Chinese Government has not gone out with a massive fiscal spending program because they probably know that it will not be effective while people are not able to come back to work just yet.

So I think that maybe a lot of the spending that I think is taking place – and maybe more should take place – is – comes on – from the side of trying to alleviate the impact that this is having in companies that are not able to sell, that still need to pay salaries or still need to be able to pay taxes or still have to pay some maintenance expenditures to get some kind of support from the government on that front so that you don’t have, all of a sudden, on the back of this, massive bankruptcies or people getting laid off, et cetera.

So I think that we may see more fiscal stimulus once the coronavirus episode is over or things are completely – basically, the situation of people able to go back to factories is normalized.  Before that, I think that it – any announcement may basically not be implementable if you still have this constraint on the ability of people to go to work.

What we have in our forecast, by the way, when I told you the growth deceleration, in the case of China, we reduced from four-point – sorry, 5.9 to 5.4.  That forecast already assumes some fiscal stimulus somewhere between .5 and .7 percent of GDP from the side of the Chinese fiscal policy response.  But it’s still rather modest.  For comparison, on the back of the global financial crisis in 2008/9, the fiscal response of China added up to I think 7 percent of GDP.  So from that perspective, it’s still rather modest.  But again, well, there’s this other element as well which I didn’t mention that the reason why last year and the last couple of years the Chinese authorities have been tolerating a growth slowdown is because there is the issue of high leverage in the economy.  With debt, if you add public, household, corporate debt exceeding 250 percent of GDP, I think that the authorities are being quite wise in making sure that that problem doesn’t escape their radar.  That’s why I think that they are limiting the fiscal policy response, because they don’t want to once again start fueling these debt-to-GDP issues.

MODERATOR:  Okay, this is our last question.

QUESTION:  Hello, I am Hyun Kim from South Korea, Korea Economic Daily.  And there is a saying that coronavirus will accelerate the supply – shifting of the supply chain from the China to the – as well.  And do you believe this?  And which country will going to be a winner or loser in case of this shifting?

MR OGANES:  Well, during the trade tensions there was a lot of talk that even though, okay, there is this phase one agreement and hopefully there’ll be a phase two and a phase three and eventually the U.S. will roll back the tariffs that it has imposed on China and that we will all be happy ever after, there is a huge uncertainty of when and if this will happen, right?  So that is why there is a lot of talk that companies do feel that they need to rethink their supply chain arrangements for the future, and maybe looking for manufacturing facilities in third countries that are not exposed to or subjected to U.S. tariffs just so that they don’t lose competitiveness.  And in that process there is talk that, okay, there are some countries that could benefit from it, right, and there’s obviously several countries in Asia that are trying to capture some of this reallocation of supply chain – supply chains that are in East Asia or Southeast Asia.  Even in India, I remember I was in Delhi in September last year and the trade tensions with U.S.-China were quite high, and when I spoke to people in the government, part of the rationale for cutting corporate taxes to bring them more in line with Southeast Asia was interesting enough – the intent of also positioning India as a potential destination for some of this rerouting or reallocation of supply chains or manufacturing to other countries, right?

But the reality, though, and I mean – and again, it depends on the scale, right?  The reality is that we have a lot of – without saying names, a lot of clients that are corporate clients of ours that have huge manufacturing presence in China that they tell us the scale of production that they have in China cannot be easily replicated in other countries without massive investments and without a lot of time spent in the process.  So I think that this thought on paper sounds logical that yes, if you have the risk of U.S. tariffs, you may look to build your factory somewhere else, but you cannot replicate “China Inc.” easily in these countries where they are smaller, they don’t have the skill set, they don’t have the resources, the manpower, basically the scale to replace.

So at the end of the day, many companies, many clients tell us that they would never be able to replace their manufacturing away from China, which means that if the U.S. imposes tariffs on their products and they eventually are going to need to keep manufacturing in China, pay that tariff, and the tariff is going to be passed on to the final consumer price.  So it will be the consumer, U.S. consumer, paying the price of the – the higher price because of the tariffs, right?  So it is – it is – again, you’re going to have probably good examples in both cases of some companies that did successfully go somewhere else, but others that because of their large scale, they would just stay in China.  There’s no way around it, at least for the foreseeable future.

MODERATOR:  I want to thank you so much for your time today.  That was incredibly informative.  That concludes today’s briefing.  It was on the record.  We will share the transcript with you as soon as it’s available.  And please keep your eyes on your inbox as I will be sending invitations to other briefings in the Wall Street series – two next week and then following in the weeks to come.

So thank you very much.

MR OGANES:  Thank you.  Thank you.  (Applause.)

U.S. Department of State

The Lessons of 1989: Freedom and Our Future