Global risk appetite is rising again. This comes following a developing U.S.—China trade truce, easing Brexit worries, expectations of a long pause by the U.S. Federal Reserve, a turn in the semiconductor cycle and a stabilizing Chinese renminbi. The Fed's pause, validating a “no recession” outlook, and the potential for a rise in emerging market (EM) growth and earnings relative to developed markets suggest the onset of a positive impetus for both EM equities and currencies.

We believe the main risks to the outlook are a reversal of progress in trade negotiations, a resurgence of recession fears in the U.S. economy and, importantly, the wild card of U.S. Democratic primaries in the first quarter of 2020 that could affect risk perceptions negatively just as the global economy is lifting. This could affect a large swath of the U.S. equity market, especially the technology and banking sectors. A negative U.S. market likely would drag down global markets; we believe the best environment for EM and Asian equities is moderate U.S. growth, a sideways U.S. market and a weaker U.S. dollar.

Within EM, where might be the greatest traction? Asia looks to be the biggest beneficiary of an easing trade conflict, a turn in the semiconductor cycle and a firming renminbi.

Within Asia, we believe the more open and tech-oriented North Asian economies such as Japan, South Korea, Taiwan and China, may outperform as Southeast Asian markets in general are not as big a beneficiary of a U.S.—China trade resolution and have little tech exposure. While the just-concluded Phase One trade deal could improve the overall global trade climate, China's commitments to increase agricultural and tech imports from the U.S. in the near term could divert some demand away from countries such as Vietnam, Malaysia, Singapore and Thailand. That said, the trend of global supply-chain relocation will likely continue on labor cost and geopolitical risk diversification considerations, and we believe this will benefit Southeast Asia and India in the medium term.

VIETNAM

Vietnam should continue its secular uptrend, supported by continuing production relocation investment out of China. The start of a new political cycle in 2020 should also add renewed policy impetus, while the Euro-Vietnam free-trade agreement is likely to support export growth. An International Monetary Fund-supported revaluation of historical GDP by 25% will improve public debt and fiscal headroom, allowing increased public spending on infrastructure to support future growth. Adding to this economic tailwind, reforms such as passage of a new securities law and improving regulation on foreign-ownership limits, the upcoming launch of “Diamond ETFs” (funds that circumvent foreign-ownership limits, and help to address the issues of access to Vietnam's stock market) and the improving prospects of Vietnamese banks should draw new money into a wider range of listed stocks. We believe these changes should also help to pave the way for Vietnam's ultimate inclusion in the MSCI EM index. The moderate valuation for the Vietnam Ho Chi Minh Stock Index (VN-Index)—13.2x Bloomberg consensus 2020 price/earnings ratio—is supported by strong forecast earnings growth of 20%.