This article is part of Your Guide to Emerging Markets. All this week, we are focusing on emerging markets, sharing their potential pitfalls – and where you can make a pretty penny.
Emma Wall: Hello, and welcome to the Morningstar series, "Market Reaction." I'm Emma Wall and joining me today is Rob Secker, Investment Specialist for M&G.
Hi, Rob.
Rob Secker: Hello.
Wall: So, it's been quite an eventful week for Asia. We've had the Trump-Kim summit where there apparently was a promise to end nuclear threats between the two nations. However, if you looked at markets, you probably wouldn't be able to tell that such a seismic geopolitical event happened this week, could you?
Secker: No, exactly right. I think this week particular is demonstrative of the market's behaviour. It's just moving from one event to the next event, to the next event, to the next event. So, you had the Trump-Kim summit; you then moved quickly on to ECB stepping back from QE. Next week, there will be something else happening for sure. So, markets seem to take it in its stride and immediately race on to the next story.
Wall: Do you think that means that we've put the threat behind us? Or do you think this just means that actually markets have so much momentum at the moment despite the sort of blip earlier in the year that almost nothing will phase them?
Secker: Well, I think, something like Trump-Kim nuclear armament, disarmament, whatever you'd call it, is incredibly hard for investors to try and react to. How do you react to that? So, they move on to stuff they can react to, stuff that's economically sensitive, stuff that's company earnings related. You focus on what you can, understand what you can forecast rather than what you can't.
Wall: I suppose then that next question is, what can you forecast at the moment and what does the sort of future of markets look like for Asia?
Secker: For Asia, particularly, I think, you are in a reasonably good place over here. I think when you look at markets globally, they are supported by a fairly benign macro environment. You've got pretty much synchronised global growth. You've got decent earnings growth in Asia where we are today. You've got relatively attractive valuations as well. So, I think, the environment today is supportive for equities and is supportive for Asian equities for all of those above reasons; valuations, the micro and the macro.
Wall: Where does that mean the investors are finding value? You touched on the fact that emerging markets versus developed markets they look better value. But all markets moved up in 2017. It was quite an incredible year as long as you were in the game. I don't think this year is going to end in the same way, is it?
Secker: I don't think so, possibly because the magnitude of the movements that we saw in 2017, it's hard to keep registering such sizeable gains. I think the outlook for the markets is still, as I said earlier, still supportive, it is still positive.
Wall: And so, then these macro events are not the thing perhaps that will get in investors way for making gains. It will instead be fundamentals, it will be company-level stuff?
Secker: I think you have to separate to a degree the macro from the micro and the macro effect in equity markets tends to do short-term moves. But over the longer-term what drives markets is not the prevailing economic tide. It's the corporate delivery year-on year-out. And for that reason, we are positive on Asia. And to your earlier question about where is the value in Asia, I think, it's definitely in the North Asia trade rather than a South Asia trade reflective of the valuation opportunity in markets such as Korea, Taiwan. In China, it's a very polarised market, but there are distinct pockets of value opportunities to be had.
Wall: And you are over in this part of the world talking to clients. What is it that people are worried about if it's not stuff such as the Trump-Kim summit or even Trump's trade tariff threats that he has been making this week as well? What is concerning investors that perhaps would cause a pullback?
Secker: Yeah, it's an interesting question, because if you were to go back a couple of months, trade tariffs were front and centre of people's minds. Where you are and where the markets have been over, say, the last five, six weeks has been focused on rising rates in the US and the tightening of liquidity, the pulling back from QE in Europe, how does that impact emerging markets particularly, because there's a view, tighter liquidity, bad news for emerging markets.
And you have seen that play out in a number of markets, but there's those markets with current account deficits and in truth it's played out mostly in the FX markets. So, today, the concern is, is Fed policy, Fed tightening going to suck all of the liquidity out of emerging markets. It's a great question. I don't have a great answer to it. But I think broadly speaking, tighter liquidity in the US is a reflection of strength in the US economy, still the world's largest economy. That's very good for global growth, that's very supportive for top-line in emerging markets.
Wall: Rob, thank you very much.
Secker: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
