Emerging markets are tentatively picking themselves up from the floor after a rout that’s wiped about $5 trillion off the value of stocks since a high in January 2018. But the reprieve may not last long.

Rising rates in the U.S., a stronger dollar, Beijing and Washington’s trade war, lower oil prices and the emergence of populist leaders in Latin America’s two biggest economies could all weigh on markets.

“The theory is dead simple: emerging-market assets have already bombed, so the downside, if things get worse, is much lower and if things recover they have greater potential to perform,” said Anthony Peters, an independent analyst, formerly at Blockex Ltd., who’s long covered developing nations. However, “they have the potential to go much lower for much longer than anybody had ever thought possible.”

The Fed and the Dollar
Investors will be carefully watching the U.S. Federal Reserve after Chairman Jerome Powell wasn’t as dovish as they’d hoped in comments that followed the central bank’s interest-rate increase on Dec. 19.

A report said President Donald Trump has repeatedly discussed firing the central bank chief, but Treasury Secretary Steven Mnuchin moved to reassure financial markets that Powell wouldn’t be ousted.

Added to that, the European Central Bank is set to end asset purchases that have pushed billions of euros into higher-yielding markets such as Poland and Hungary. That may force eastern European monetary authorities into rate increases they’ve long resisted.

In emerging Asia, economies heavily reliant on foreign investments, such as Indonesia, will face the challenge of maintaining currency stability and stemming outflows.

Trade Wars and China
Chinese President Xi Jinping remains defiant, telling some of the nation’s most influential military and business figures that Beijing won’t back down quickly to U.S. trade and investment demands. Any increase in tensions between the world’s two dominant economies would probably deal a blow to Asian assets. They’ve already taken a hit, with China’s main stock index suffering its worst year since 2008 and equities in South Korea and Taiwan also falling sharply.

A U.S. trade delegation is preparing to travel to Beijing for talks slated for the week of Jan. 7, Bloomberg News reported in December, citing two people familiar with the matter.

Brazil and Mexico start 2019 with new populist presidents, albeit from opposite ends of the spectrum. Brazilian stocks rose to record highs after President-elect Jair Bolsonaro said he’d sell dozens of state-owned companies and picked University of Chicago-trained Paulo Guedes as his chief economic adviser. Still, the right-winger faces a tough challenge reforming the country’s generous and exhausted pension system, which will be key to sustaining the market rally.

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