Emerging Markets Insights – Politics and the Global Slowdown

Stockholm (Ekonamik) – Emerging markets have been dominated by China, its recent GDP growth figures, its trade negotiations with the USA and how the neighbouring Asian emerging markets are expected to benefit from these issues. As the most weighted country in the MSCI Emerging Markets index, the motivation for this focus is easily understandable. However, India, Brazil, Argentina, Turkey, Indonesia and other markets also featured prominently in asset managers’ considerations.

As a recap, we take note of Northern Trust‘s Investment Manager Survey, published at the end of 2018. According to the report, 56% of investment managers it had surveyed expected a decline in emerging markets. 88% of investment managers believed that emerging market equities were undervalued or fairly valued. 66% believed emerging market equities were undervalued – the highest for any region. 44% of investment managers expected emerging markets corporate earnings to increase or remain the same.

Kevin Daly, Portfolio Manager for Emerging Market Debt at Aberdeen Standard Investments, discussed his outlook for emerging markets in 2019 in Aberdeen’s podcast series. According to him, 2019 should offer a much more constructive backdrop for emerging markets. The portfolio manager notes that 2018 was dominated by very strong US growth, rising policy rates Fed and a strong dollar. “All these factors were sucking dollars out of emerging markets and into the USA.”The combination of softer growth in the USA, a more dovish Fed and a softer, or sideways, US dollar should be more very supportive for emerging market assets” in 2019, he argued. The main emerging market events for 2019 the portfolio Manager highlighted were the Ukrainian election in March, the Indian and South African elections in May and Argentina’s election in October.

At the end of March, Christiaan Tuntono, senior economist for Asia Pacific with Allianz Global Investors, suggested that while China will go some way towards solving its trade dispute with the United States by fixing trade malpractice, it is still unlikely to curb government subsidies or change its economic strategy. Investors should look to a “winners from trade” investment theme, namely technology, industrials and energy and materials likely to benefit from lower tariffs and enhanced global growth, he says.

Amundi Chief Investment Officer Pascal Blanqué and deputy CIO Vincent Mortier write that the continued dovish stance displayed by the major central banks in the world probably still play in favour of Emerging Market debt markets, despite recently deteriorating momentum. Amundi’s investment team favours EM countries with cheap valuations or those qualified for index inclusion.

GAM investment director Charles Hepworth said that the firm’s policy last year had been to advocate an overweight equity position with fixed income exposure tilted towards emerging market debt and subordinated financials. This helped GAM endure challenging market conditions in the second half of 2018. It has held its “allocation nerve” in 2019, however, as stronger performance years generally follow softer ones.

In light of recent data releases for April, Lyxor Asset Management was bullish on emerging markets. “For now, the equity rally has simply corrected 2018’s downward excesses,” said Florence Barjou, Head of Multi-Asset Investments at Lyxor Asset Management. “Overall, we continue to look beyond a potential short term correction risk, and still favour equity markets over sovereign bonds and still prefer Europe and emerging markets. We maintain our positions in high yield debt and remain underweight on sovereign bonds,” she added.

Mary-Therese Barton, Head of Emerging Market Debt, Alper Gocer, Head of EM Local Currency Debt at Pictet Asset Management argued at the end of April that emerging market bonds were poised to provide relative value in 2019 on account of slowing growth worldwide and the implementation of various stimulating policies

Matthias Hanauer, Researcher at Robeco, took a deep dive into the five-factor Fama-French model and argues that it works for emerging market, although alternative factor definitions are more robust

Schroders multi-asset investment view for emerging markets was optimistic. “We are seeing noticeable recoveries in momentum signals both on price and earnings revisions, particularly in China,” the asset manager noted at the end of April. Nevertheless, “despite a stable outlook, we expect future returns to be driven only by short-dated bonds.”

Templeton Global Macro, led by Michael Hasenstab, Ph.D, updated their proprietary Templeton Global Macro ESG Index, which uses expected developments in ESG factors to inform long term investment decisions. The analysis singles-out Argentina, Brazil, India, Serbia and Indonesia as the countries where it expects the most improvements to the TGI-ESGI scores. The same index ranks Venezuela, Nigeria, Tanzania, Ecuador and Kenya at the bottom.

UBS Asset Management‘s April review of emerging markets expressed a concern about Argentina and Turkey, noting that politics continued to plague emerging markets. “Argentina and Turkey were once again the main protagonists in an otherwise calmer quarter,” the report argued, before remarking that “Argentina’s asset prices had very mixed behaviors in 1Q. Credit spreads, rates and FX rallied in January together with the rest of EM, only to sell off in February and March reflecting the significant drop in economic activity and its highly negative consequences on the popularity of the reformist government ahead of elections in October”.

In another report, Evan Brown, Head of Macro Asset Allocation Strategy, Investment Solutions at UBS noted that “emerging market equities have recently performed well despite a continued deterioration in EM corporate earnings. The surge in Chinese social financing bodes well for EM growth over the coming months.”

Finally, Unigestion published a fascinating analysis of the gap between fixed income and equities in emerging markets. The article compares the yield on an index of EM government bonds and the forward-looking (12 months) earnings yield of stocks in the MSCI EM index. The comparison shows that “yield has continued to decline as equities have continued their rally.” Unigestion expects macroeconomic developments to determine whether the convergence will be driven by a fall in equities or a rise in bond yields.

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