I’m headed home from the latest IMF/WB annual meetings in DC. As always it was a great place to catch up with old friends and market contacts and get a sense of market and economic “vibes”. Coming so close to the US elections, where polls are so so close, there was an odd sense of limbo regarding many global macro questions. The IMF forecasts were not changed much, but generally assume a move down in growth (and some commodities like oil) next year. This post will survey some takeways, with some follow-ups to come on specific geographies.
Overall, short-term worries about the US economy have mostly receded (partly due to US industrial policy supporting investment and resilience), but longer-term ones remain. Meanwhile growth worries elsewhere in the world (Europe, China, some other large EM) are looming, and the very “resilience raises questions about the scope of monetary easing. Fiscal pivots too are in the frame and harder to do, which may also limit monetary easing and growth space . The biggest concerns on growth tended to be about Europe, where worries about the growth model persist, due to the competition challenge from China and potential impact of tit-for-tat trade conflict with China and a more difficult environment with the US, especially under a Trump administration. Overall, the mood was cautiously pessimistic for many, especially those hoping for longer-term development objectives.
A few takeaways
- Geopolitical risks in focus, but term is muddy which makes it harder for people to articulate the impacts: Investors have arisen to geopolitical risks but seem to use the term to cover a wide range of issues from US-China tensions, Iran related MENA escalation risks and questions about what happens next in Ukraine. Which play out and their probabilities reshape the market relevance or the long-term implications.
- Energy regulation, migrations and maybe tariffs would be day one priorities for Trump if elected. While Energy companies want less environmental restrictions, their cost structures suggest production gains might be overly optimistic.
- Tariffs are ahead, but wide range of outcomes especially in the short-term even if Trump wins . Many “close to the Trump campaign” have been trying to suggest tariffs will be phased and an opening offer, but his repeated focus suggests caution.
- US debt concerns starting to rear their heads. While few investors seem worried in the near-term about market absorbing the issuance, the medium-term outlook is could keep longer-end of the curve high. IMF had a powerful chart showing the US debt service to revenue costs put it in the camp of low income frontier markets. Lower rates will help a bit.
- Fiscal stance across some EM (especially Latam) will limit easing. Mexico and Brazil are among them, but also Turkey and in more extreme manner Russia. The outlook for EM looks better under Harris than Trump, not just because of tariff threats.
- Goldbugs are everywhere. Gold long seems to be a crowded trade with many folks recommending it on the political risk and inflationary risk argument and central bank diversification.
- A lot of interest in sources of yield including high-yield EM, but unclear how many are willing to bite. I was grateful to hear from a number of frontier market governments and IMF teams and there was quite heated discussions. Overall. Interest but wariness especially on some credits like Nigeria, Angola, Mozambique all of which have complicated stories.
Geopolitical Risks Need to Be Unpacked Better: With a broader willingness of governments to use a full geo-economic toolkit to meet economic and security goals, it’s no wonder investors are focused on geopolitical risks and that these extend beyond just traditional commodity plays. Similarly, with a range of conflicts under way and developing shadow networks, On oil, I tend to agree that risks of direct Israel- Iran hits that undermine energy security is slightly higher than 4-6 weeks ago (but much less than 3 weeks ago). The big risk is something that would keep GCC from adding spare capacity. That is lowered by the Saudi-Iran detente that limits Houthi attack risks on GCC infrastructure. There are scenarios that lead to escalation, but many players in the region are wary of them (even if they would lead to higher prices).
Other “geopolitical” concerns revolve around supply chains that might be hard to price in the short-term but which are sparking new winners and losers as trade is rerouting and relying more on indirect trade. Plus don’t forget the growing compliance industry and the need for companies to report much more about their suppliers, buyers and end-users across a range of sectors. From a financial side, despite China’s recent equity rally, many US/G7-based investors are still investing in EM ex China or finding instruments that allow them to avoid the China market. This is becoming a more bifurcated financial market both from an asset perspective and banking dynamic. Sanctions compliance (and forced non-sanctions compliance) means that some banking systems are getting split into entities that will take on Russia, Iranian and other trade and those that will not. All of this is likely adding to a slow contraction of correspondent banking relationship nodes. Overall volumes of global trade aren’t going down though, just going through different channels. It’s a decent time to be an intermediary.
China: Market actors seem to have coalesced around a view that China’s ‘stimulus’ could continue to help local equity markets, especially if the PBoC and other government entities continue support, but they are less convinced that it will feed through to the broader economy. For most the view is that it will provide a floor for property and support assets but that real final demand might struggle. Arguably there’s a sectoral divide here as some sectors including AI/Tech, Pharma, even EVs continue to benefit from implicit support. But, the fact that Chinese exports are again a positive contributor to growth will run into challenges amid the increased tariff posture of many developed and emerging economies.
BRICS show: As I noted in my look-ahead, the first part of the Washington meetings coincided with the BRICS summit in Kazan, Russia, which showcased a wide range of emerging and frontier markets who are willing to push back against western-led economic rules and feel very strongly about keeping their options open. The sheer number of countries that showed up is a powerful message about the interest in both new trade, investment and growth drivers – or at least not being required to take sides in trade wars and sanctions corridors. A new group of “partner countries” was created, including as its group NATO member Turkey and highly sanctioned Cuba. The scale of attendance had to be a positive for Putin, showing that few countries bar Saudi Arabia’s MBS, were wary of showing up.
But on the other side, that diversity (and that of the smaller group of full members) makes group wide measures more difficult to achieve. I continue to expect that smaller group pilots of payments and other initiatives may be more extensive than group wide measures, but note that the technological platforms domestically at least are picking up. As expected broad-based creation of new payment systems was not endorsed by members, nor were some of Russia’s most out-there ideas to project power through the group. Bottom line: the desire for select transaction channels is rising, and the sheer amount of commodity trade that comes from sanctioned channels is growing. These facts mean that the push for payment means that reduce sanctions exposure will only rise. The US and G7 would be wise to take notice and think about ways to make sure their offerings on the investment and other side are attractive. Otherwise the efforts to create supply chains less reliant on China will struggle.
US elections: Few people were willing to make a call on the election- which remains far too close for comfort. That said, some folks felt that market comfort with “divided government was mispriced given how close the presidential race is. A points on that. A “red sweep” for the GOP would be less effective on a policy side if the margins are low and coalitions hard to keep together. That said, polls are tight and results might take again until the weekend, especially if it’s a Harris victory.
Market actors seemed to be wary of holding too much risk going into the election, especially given the currency and rates dynamics and possible differential rate dynamics. The polls are very close, and on various topic areas especially trade, migration, energy transition/renewable investment, outcomes could differ dramatically. Trump advisers tended to try to downplay the macro impacts of the policy proposals, suggest that tariffs could be a negotiating tactic for a trade and policy issues.
Energy is a key area of divergence, especially regulation which a Trump campaign has pledged to lift on day one (though some of the predrafted EOs are subject to debate). Environmental reviews, restrictions and especially the LNG pause will likely be lifted quickly. It remains to be seen though if such measures will really unleash the activity that Trump and advisers like Scott Bessent hope. He calls for a 3 mbd production increase (or oil equivalent), suggesting that the US is falling behind EIA forecasts by a long-shot. However, just removing regulation (and associated costs) may not unleash as much production and investment as hoped. While producers have benefited from efficiency gains over recent years, they won’t expand if they would lose money doing so. The government price comfort level, energy CEOs and OPEC+ are likely all three different bands and the latter two may be closer than the first. Still, what seems clear is that investment rules on ESG, environmental reviews etc will be removed. Changes to the IRA may be more muted, given the interest in developing US production and supply chains – and the fact that some measures would require Congressional approval to shift.
Tariffs/Trade – While tariffs are a bipartisan tool of choice, Harris would likely use them in tandem with other industrial policy tools and on the sectors and subsectors benefiting from public support. That could include a wide variety of areas going forward especially if new manufacturing credits are approved. Harris too would likely try to build coalitions with friends to raise standards and trade barriers rather than just engaging in bilateral negotiations. It remains to be seen if Harris would adopt a more extensive offensive trade policy, or put more effort into actually adding some more heft to IPEF or bilateral agreements. Such deals might be needed for critical mineral and other industrial policy goals.
The Trump tariff plans as articulated, have many risks. These include the risk of a widening fiscal gap from a reliance on tariffs and corporate tax cuts risk if revenues fall is not offset. If tariffs work and raise revenue or maintain it, then inflation could be extensive if tariffs broad based. If they work and support US production or diversion, then revenue shortfalls will cut other spending needs. While tariffs could be phased in for negotiating effect and typically require warning time periods, currency and rate response could come more quickly. Moreover, China and others could utilize their own tools to make it harder for the US to create new less-China reliant supply chains. Still, what’s notable is a wide range of outcomes especially if key Trump advisers in the tech sector weigh in on policy.
Debt problems in frontier markets still a challenge. Although some agreements have been reached in the last year, and investors are showing some interest in some frontiers, attracting capital to build infrastructure a tough bet. That will be particularly so if US rates remain high. Efforts to cut IMF debt surcharges will help some of the largest debtors, but won’t solve the problem. Looking ahead the next US administration will need to think about ways that both bilateral funds and multilateral ones can be made available. That could mean allocating more funds to investment bodies such as the DFC which can make investments in infrastructure projects abroad (and recently supported some Mineral Security Partnership (MSP) projects in Brazil and elsewhere) while also considering how to bolster IFI availabilities.
Ziemba Insights 