EMERGING MARKETS: IN SEARCH OF A BALANCED BALANCE BETWEEN RISKS AND OPPORTUNITIES

  • Emerging markets ended 2018 with a better tone due to the economic policies of the Asian giant, the change of discourse of the Fed and the evolution of trade tensions between China and the United States.
  • Russian equities are quoted at cheap valuations: their forecast of 5 times is a big discount compared to their own historical average and the current average of 14 times of the emerging market
  • Carmignac, SYZ AM and PIMCO talk about the opportunities and risks of emerging markets in 2019

In 2018, emerging markets registered a period of increasing risk aversion as they were affected by the sum of several factors: the increase in interest rates in the United States, the appreciation of the dollar and the significant political tensions facing the United States. China, Russia and Turkey. Will investors keep this perception in 2019 as well?

In the opinion of Xavier Hovasse, head of emerging equity in Carmignac , the main risk that weighs on the mind of the investor is the effect that the trade war will have on emerging markets, international tensions that have not yet come to an end. “In this context, we set out three requirements that must be met in order to adopt a more constructive approach towards emerging markets: the relaxation of commercial tensions, the economic recovery in the main emerging markets and the adoption of a policy of monetary easing by the Bank. Popular of China (PBOC), “he says.

For Hovasse, emerging markets ended 2018 with a better tone due to the budgetary and monetary policies applied by the authorities of the Asian giant, the relatively stable level of the dollar and the truce in the trade dispute between Beijing and Washington, which increased our confidence in a positive outcome of the conflict. These events were clearly favorable and led to a rebound in emerging markets in the first weeks of 2019.

“However, the only factor that prevents us from talking about a bull run of emerging markets is the generalized economic slowdown that we are seeing. For this reason, for now, we maintain a cautious optimism, we stay out of the cyclical values, which will be the first to be affected by the slowdown, and we focus instead on growth values in underindependent sectors, where demand is less sensitive to fluctuations in GDP “, says the head of Carmignac.

Some managers such as SYZ AM defend that emerging markets are attracting the attention of investors. The reason is simple: “Unless there is a global recession, in our opinion, the emerging market is attractive at its current overselling levels, as there are several positive stimuli, including a trade agreement between the United States and China and a lower rate of rate hike by the Fed, “they say from SYZ AM.

In the opinion of Zafar Shoaib, senior analyst at SYZ AM, opportunities remain numerous throughout emerging markets. Among the markets that stand out are Brazil, China, India, Russia and Pakistan. “Russian equities are quoted at cheap valuations: their forecast of 5 times is a big discount compared to their own historical average and the current average of 14 times in the emerging market. The cost of oil production of an exporter such as Russia has one of the lowest equilibrium points in the world and important oil companies such as Rosneft, Lukoil and Tatneft are well placed to maintain and increase oil production at a price lower than 30 USD on barrel. Thus, although oil has shown weakness lately, it is unlikely that this will lead to greater volatility of profits for the sector,

In this regard, the latest report on Prospects in Asset Allocation for 2019 of PIMCO – prepared by Erin Browne, Multi-asset strategy portfolio manager, Geraldine Sundstrom, Asset Allocation Manager and Mihir Worah, Investment Director of asset allocation and real profitability of the firm- indicates the currency part of emerging markets as an option to look for opportunities.

According to the document, “despite idiosyncratic risks in emerging markets, the elements related to valuations and returns justify maintaining a small exposure to a basket of emerging currencies.” In this sense, the firm suggests that it would be expected to increase the risk in its portfolio by increasing the weighting of equities, “especially in sectors and countries with a cyclical orientation, such as Europeans and emerging countries, cutting our exposure to the global duration.”

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