Will rise again emerging market assets in 2019?

  • Emerging market corporate bonds should offer strong returns over the next few years, as companies in these regions have good fundamentals 
  • The valuation of emerging equity has fallen well below its long-term average
  • The risk to many of the economies of emerging countries is their dependence on China for their exports
  • MainFirst, Pictet Asset Management, Robeco and GAM Investments give their view on the opportunities that emerging market assets will offer this year

By Funds Society, Madrid2018 was a jug of cold water for many emerging market assets due to the strength of the dollar and the crisis in Venezuela and Turkey. However, fund managers continue to point out that their fundamentals have improved and can play an important role in this year’s portfolios as long as the relationship between profitability and risk that the investor can assume is well adjusted.

In the opinion of Thomas Rutz, MainFirst emerging markets investment team, emerging markets are one of the most attractive investment destinations for this 2019, especially corporate bond, because “we expect emerging market companies to be more resistant than its peers at the US high-yield and the eurozone, even in a bearish economic scenario. In addition, the economic outlook also leads us to think that, in terms of return-risk, credit is a much more attractive investment than equities. “

For Rutz, fundamental solids support the profitability potential of emerging markets. “Corporate bonds in emerging markets should offer solid returns in the coming years, since companies in these regions have good fundamentals, have potential for improvement, are less leveraged and, therefore, have a greater margin of maneuver than the companies of developed countries. For example, JP Morgan Corporate Emerging Market Bond (CEMBI) bonds offer a risk-return ratio identical to the high yield in dollars and euros. Moreover, unlike industrialized countries, emerging markets are still in an early cycle or, at most, in the middle of the cycle and, therefore, still have a lot of growth potential.

Regarding equities, the US monetary policy and the increase in the growth differential favor the actions of emerging markets favoring this type of asset. In addition, the decrease in valuations derived from the massive sale of 2018 could be an important boost. “2018 has not been a good year for equity markets in general, particularly for emerging markets. Globally, stocks have fallen by 4.1% in euros, while emerging market equities have registered a negative return of more than 10%, also in euros, “says Jeroen Blokland, manager of Robeco .

In his opinion, taking into account the latest movements of the markets, there is a good chance that emerging markets will resurface from now on. The pieces of the puzzle are fitting little by little: “Valuations could become a catalyst. The average price / earnings ratio of emerging market stocks has fallen by no less than 30%, as a result of the massive sale recorded last year. “

According to Blokland, as a result, the valuation of emerging equities has fallen well below its long-term average. “In addition, although the pattern shown by the valuations of developed market shares is similar to that of emerging countries, especially outside the United States, emerging equity remains fairly affordable in relative terms. While it is true that rarely this can lead to a change of direction in the markets, we believe that the current level of valuations can be a significant boost when things start to change, “he adds.

Tim Love, director of investments of GAM Investments, goes a step further and affirms directly that the actions of emerging markets are underinvestment, undervalued and underqualified. “We think that emerging market stocks are close to concluding their bearish evolution and that the current decline could be a successful entry point. In terms of emerging market valuations, the price / earnings ratio (PER) of the MSCI EM index has fallen to very low levels, below 10, which contrasts with the figure for this time last year (11.85). We predict that the emerging market PER will readjust upwards, approximately, to 14, in 2019. “

Regarding the exposure of the strategy, Love points out that he feels more comfortable with Brazil and Russia. “In Brazil, we believe that the economic environment is very positive for the outlook for equities, specifically, the newly elected government, prone to the company. We believe that the market sentiment in Brazil has veered in the right direction: it improves consumer confidence, interest rates fall, the government is prone to the market and valuations are affordable. We also lean towards Russia for similar reasons, without prejudice to the possibility of new sanctions being applied. With respect to our recent overweight in VARP border markets (Vietnam, Argentina, Romania and Pakistan), we continue to be optimistic, specifically, around Vietnam, since Vietnam has benefited greatly,

For its part, Anjeza Kadilli, an economist at Pictet Asset Management , warns that the risk to these countries is their growing dependence on China for their exports, especially in the current context of global trade tensions. Exports to China have been on the rise since 2000 – to a lesser extent those of Colombia – and China is already the main trading partner of Brazil, Chile and Peru.