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Inside China 16 January 2026

A world upside down

Jeremy Stevens

  • Emerging-market (EM) GDP will likely ease only slightly, to 4% in 2026, with China’s ongoing slowdown acting as the main drag, but offset by firm (at least trend-consistent) growth in Africa and Latin America.
  • Headline inflation across emerging markets is forecast to decline, to 3.5% in 2026. However, the underlying floor will be lifted by structural forces such as supply-chain rewiring, rising demand for green-transition metals, and intensifying climate shocks. This will likely leave less room for rate cuts than in previous cycles.
  • The path of the USD is the critical pivot: our base case expects further USD depreciation in 2026 (5%), driven by debasement dynamics and policy distortions, with risks skewed toward even more weakness. However, any rebound would reignite carry-trade stress, widen US-local yield spreads, thereby pulling money out of EM assets, and tighten domestic financial conditions. EM central banks will face a dilemma again: headline inflation is moving up (because of FX pass-through) but underlying growth and market sentiment are deteriorating.
  • Tariff-review clauses, embedded in the current trade truce, will expire between July and September 2026. If, for instance, Washington imposes a blanket 10% levy on emerging-market exports (except those of China), the aggregate growth rate for emerging markets would fall by roughly 60 bps within two quarters. Thus, with a wide range of combinations of responses on the menu, once the review clauses are reopened, it would be an abiding political risk.
  • China’s export machine has tripled its trade surplus with emerging markets, driven by electric vehicles, batteries and solar equipment. China’s shipments to Africa surged 25% in 2026, embedding yuan-centric supply chains and squeezing rival manufacturers across the developing world; simultaneously, China has become more sensitive to the trajectories of the economies of the global south.
  • The energy transition, coupled with the AI race, is locking in decade-long offtake agreements for copper, cobalt, lithium and rare earths. African producers must negotiate robust local-processing and beneficiation clauses now.
  • Faster emerging-market GDP has not translated into superior shareholder returns. Despite growth outperformance, the MSCI Emerging Markets index has underperformed the S&P500 by roughly 500 bps annually. Here, benchmarks are capital-intensive, currency-debasing, and net-dilutive. Closing the gap would require widespread share buy-backs, a weaker dollar, and enforceable minority-shareholder rights.
  • For 2026, the recommended portfolio posture is a bar-bell strategy: overweight local-currency sovereign bonds offering real carry of at least 250 bps; keeping commodities at neutral weight (except for a few deglobalisation and electrification bets); and holding a modest allocation to cyclical equities. Further, standing ready to rotate into cash or hard-currency paper if the USD proves resilient, the Federal Reserve foregoes cuts, or Brent crude falls below $50/bbl or breaches $90/bbl. 
 

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