It has been a torrid time for emerging markets. After 10 years of incredible growth, the past five years have tested even the most patient investor. The China slowdown, commodities cool-off, slowing trade growth, fall in productivity and increasing levels of debt in the region have all acted as headwinds for investment returns.
It is not all doom and gloom however. Alex Wolf, emerging markets economist for Standard Life Investments said that these risks had not gone away, but that countries that implement productivity enhancing reforms can break out from the pack.
“Emerging market economic growth is lower than it has been in recent years. But this is just a return to norm. Before the commodity boom emerging markets growth ran at only a few percent more than developed economies,” he explained.
Speaking at a briefing yesterday Alistair Way, head of emerging market equities for Standard Life said that the outlook for emerging markets was uncertain, and it was too early to be “unambiguously positive”.
“We need more certainty around the outlook for China, and visibility from the Fed regarding rate rises,” he said.
His colleague Kieran Curtis, investment director for emerging market debt added: “It would be good to have two of the biggest economies in the emerging market universe, Brazil and Russia, doing well before we can say we feel positive.”
China Slowdown to Be Expected
Wolf said that the uncertainty and consequential volatility surrounding China was to be expected; the recalibrating and globalisation being undertaken was unlikely to be a smooth process.
But despite the concerns, China and its fellow Asian countries Vietnam and Bangladesh bucked the trend for emerging markets losing market share of global exports, steadily gaining over the past 25 years.
China is spending to boost growth too, buying up bonds issued by state owned enterprises and investing in real estate holdings for this sector too – a kind of back-door quantitative easing.
“Ideally over the long-run you want to see a boost to private sector spending too,” said Wolf. “As they offer a better return on equity for shareholders. At the moment investment has been focused on the state owned enterprises… we will see in time whether this focus leads to unproductive investment or ghost towns.”
Where are the Growth Opportunities?
While there are challenges, Way pointed out that a lot of the negativity is priced in, and so you did not need much to boost emerging markets – and gain a “disproportionate return”.
“We like India, it has been a consensus overweight for a while, but fell from favour in 2015,” he said. “We also like looking off the beaten track for opportunities – Georgia, Kenya, Romania and Argentina, for example. Micro, not macro events get us excited. It is hard to overstate the importance of the internet, social media is changing behaviours and creating investment opportunities.”
