Middle East: The conflict is about to widen
Niall Ferguson says the collapse of the Gaza ceasefire and the launch of a major U.S. campaign against the Iran-backed Houthis in Yemen are not isolated events—they are likely steps in an escalating sequence that could culminate in strikes on Iran’s nuclear program by mid-year. The U.S. struck first against the Houthis, launching its largest wave of attacks since 2015, then declared “sustained combat operations,” vowing to hold Iran responsible for further attacks. This effectively creates an open-ended pretext for strikes on Iranian targets in Iraq and Iran itself. Meanwhile, Tehran’s hardliners remain entrenched, refusing talks even as economic pressure mounts. With inflation soaring and the rial collapsing, the Iranian regime sees capitulation as a greater risk than economic collapse. A wider conflict looks more likely in the coming months.
China: Activity remains firm
According to the official activity data for January-February, output remains reasonably firm, with growth in production of both goods and services continuing to grow by more than 5% YoY in the first couple of months. Paul Cavey’s GDP tracker is now back around 5%, which is once again the official aim for this year. However, the details aren't robust. In particular, there's still no sign of a reversal of the steep drop-off in property construction, with starts reaching a new low in the first couple of months. Other indicators like cement production, the construction PMI and excavator sales show the overall picture for construction is more mixed, though only excavator sales suggest any real pick-up. Similarly, while home sales and the separately released data for property prices aren't collapsing in the same way as starts, they aren't pointing to robust recovery either.
China: Remain wary of recent macro data
The manufacturing sector is barely expanding, the profit margin squeeze continues, urban unemployment is rising, disposable income growth is slowing. Additionally, the country’s corporate and investment cycles suggest the economy is yet to bottom, so Sharmila Whelan advises investors to remain cautious. The situation may ease when a US-China bilateral trade deal is struck, as Sharmila expects, and the overall business cycle score has improved as Beijing undergoes a mindset shift regarding the role of the private sector; this will bode well for investment and overall economy activity in the longer run. Sharmila moves from underweight to neutral on equities, overweight to neutral on government bonds and remains a seller of the renminbi. She is selective of certain stocks and growth sectors, including AI, high tech, software, hardware, robotics and electronics.
Colombia: Little chance of progress on reforms
Marcus Buscaglia notes that Colombia has entered into full electoral and campaign mode. All parties, and especially the Gustavo Petro administration, are strategizing about the alliances they will form to optimize their chances of securing seats in the bicameral congress. As all parties are thinking about the next election, the chances of meaningful progress for any major reform are quickly dwindling. However, President Petro continues to push for polarization, wrongly believing that a majority of Colombians will take his side. Yet, Marcus believes that Colombians will be inclined to vote for change in 2026. While winds are signalling a right-wing shift, the multiplicity of candidates vying for the presidency might end up leading a far-right candidate to face a moderate candidate in the runoff election in 2026. That would give a chance to the moderate candidate to score what now seems an improbable victory.
Democratic Republic of Congo: Peace remains elusive
The M23 armed group’s last-minute decision to withdraw from the planned peace talks in Angola is yet another indicator that a resolution to the ongoing conflict in eastern DRC remains far from imminent. Although DRC President Tshisekedi and Rwandan President Kagame convened in Qatar to issue a joint statement calling for a ceasefire, the declaration is more symbolic than impactful. The M23 rebels, ostensibly backed by Rwanda, continue to press deeper into Congolese territory as Tshisekedi faces increasing pressure to directly engage with the group. For now, it is clear a lasting solution is out of reach of all parties.
Romania: Toothy concerns
The current narrative is dominated by politics, as governance risk and uncertainty has caused a sell-off in Romanian assets this year. However, for Jonathan Anderson the biggest issue remains wide "twin deficits" and heavy external issuance. Romania is still the most imbalanced twin deficit economy he follows - and while these deficits have been financed in part by FDI, EU transfers and portfolio inflows, they also reflect a massive surge in external market borrowing. Indeed, Romania is now tied for the title of largest EM sovereign Eurobond issuer. As a result, it's hard to get excited about asset markets. Even if political sentiment calms down, Jonathan worries that medium-term external stability questions will increasingly hang over the investment outlook.
South Africa: 25bp of comfort blanket
The SARB’s MPC kept rates unchanged at 7.50%, as expected. While this move aligns with Peter Montalto’s expectations, he believes the MPC missed an opportunity to cut, given the (very) benign inflation outlook in both the short and medium term. The MPC overemphasises global geopolitical and trade risks versus the realised downside risks. Still, it is quite clear they are remaining highly risk averse and want to keep a 25bp buffer vs neutral – for now - by sitting at the top end of the neutral range. The key question now is whether this marks the end of the cutting cycle. Peter reckons that it does. He maintains his longstanding view that if any further easing were to happen, it would likely be limited to just one more cut to bring rates to neutral. The baseline for now to be clear is no further cut.
