Russia remains headache for the EMEA
If 2013 was a very challenging year for emerging markets, 2014 has been even worse. Two topics have dominated the agenda. First, the continued slowdown in Chinese growth and worries about distress in the Chinese financial system, including troubles for the shadow banking sector. Second, the conflict that 'came out of nowhere' - the situation in Ukraine and the resultant conflict between Russia and the West.
Both these factors have already had a very negative impact on wider emerging market sentiment. However, we are also of the view that near-term sentiment is likely to be influenced negatively by this and, therefore, continue to see risk of a further sell-off across emerging market FX, fixed income and equity markets in coming weeks and months.
It is extremely difficult to forecast in any reasonable sense how the geopolitical situation will develop in Eastern Europe. Therefore, our forecasts more or less assume that the present status quo is maintained and there is no major escalation of the Ukraine-Russia conflict. In other words, we expect a 'geopolitical premium' to continue in Central and Eastern European markets and believe growth has already been negatively hit - particularly in Russia but also in, for example, the Baltic States and Poland. We think it is likely this will be revealed in macroeconomic data in coming months. This macroeconomic weakness is in itself likely to weigh on CEE markets to some extent in coming months.
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