FedEx Corp. failed to deliver, as did the Federal Reserve.
The two broad factors that shape emerging-market investing – global growth and the path of U.S. rates – aren’t playing out well.
On Wednesday, FedEx shares plunged 12 percent, the most in a decade, as the company cut its earnings outlook just three months after raising it. CEO Fred Smith is putting the blame squarely on politicians, saying that the U.S. trade war, China’s “mercantilism” and Brexit are all sinking the global economic outlook.
Yet FedEx is merely mirroring concerns that have dogged global markets since October, when the International Monetary Fund lowered its global growth outlook set only six months earlier.
Following on FedEx’s heels was the Fed’s December rate decision, arguably its most important of 2018, which showed that Chairman Jerome Powell is no dove. While the central bank trimmed the number of rate hikes it foresees next year to two from three, it continued to refer to “further gradual increases” in its statement, a phrase that banks such as HSBC Holdings Plc had expected it to “drop entirely.” The Fed also seems on course to continue reducing the size of its balance sheet by $50 billion a year.
Compare Powell now to his predecessor Janet Yellen in 2015. In the September meeting that followed China’s shock 2 percent currency devaluation, she dropped the idea of a rate hike that month, citing turmoil in “recent global economic and financial developments.” Financial conditions in the U.S. back then were about as tight as they are now, yet Powell isn’t budging.
Neither circumstance is good news for emerging markets. As I argued recently, the two broad factors that shape emerging-market investing are strong global economic growth, which tends to lift export-oriented nations such as China and South Korea, and the Fed’s interest-rate policies, which tend to move younger markets such as Indonesia and India.
What can emerging markets do to buffer themselves against these global headwinds?
Not much. But they can try to be nimble and align with the Fed’s meeting schedule, as Bank Indonesia did. The central bank will follow the Fed’s footsteps and deliver its rate decision today, just as it has done in March and September. Those emerging-market central bankers who follow suit can thus raise rates if Powell remains a hawk, or pause and even reverse course when he stops.
Such agility is important because global winds are blowing fast – a headwind can quickly turn into a tailwind. After all, if FedEx, a global courier with a $42 billion market cap, and the venerable IMF can shift their views within a matter of months, why can’t Powell?
Disinflation is also invading the world again. In the U.S., as a softer oil price sets in, consumer inflation expectations may have peaked, limiting Powell’s ability to hike rates in the future.
Elsewhere, China’s producer prices have already fallen into deflation on a month-to-month basis. Even in high-yielding nations such as Indonesia and India, inflation is stuck below 3 percent. It’s no surprise, then, that government bonds around the world are staging a bull run as investors once again price this in.
It’s not inconceivable that sometime in 2019, Bank Indonesia could reverse course, having raised rates by 1.75 percentage points already this year. The central bank needs to watch the Fed carefully, so as not to disturb foreign investors who hold about 40 percent of the country’s government bonds.
Right now, the messages from FedEx and the Fed aren’t boding well for emerging markets. What they need to do is align themselves with the world’s largest central bank and play nimble.
