Why conditions are right for emerging markets growth

Portfolio manager on the countries that could benefit from more accommodative central bank policies

Why conditions are right for emerging markets growth

The knock-on effect of the US Federal Reserve rate cut is helping to create a fertile environment for emerging markets, according to a portfolio manager.

David Kletz, VP at Forstrong Global, said that after the US halted its interest rate-hiking trend, he was looking towards Asia to continue its financial evolution of becoming more fiscally prudent and implementing macro credential policies.

He told WP: “Importantly, across Asia we have pretty benign inflation. What a dovish Fed does is take a lot of that pressure off central banks and, already in the past of couple of months, we’ve had Indonesia, Malaysia, Philippines, South Korea and India all slash policy rates.

“So, you are going to have a more accommodative central bank policy backdrop in a lot of these nations, where policy can actually have an outsized impact on appetites towards risk and financial conditions for business.”

He added: “In recent years, China has been attempting to deleverage its economy rather aggressively. That’s been put on the backburner but I do think that will continue to be a long-term structural imperative.

“But that curtailment to the credit cycle in China definitely did damage growth, particularly in Asia, so a relaxation of that deleveraging campaign should also start to flow into a more positive cycle in emerging markets as a whole.”

While there is a favourable macro backdrop, one of the major catalysts that will trigger risk appetite remains trade. Kletz doesn’t expect any quick resolution between US and China, acknowledging that the superpowers are at loggerheads over a range of structural elements, including the economy, military and technology.

He said: “We aren’t looking for a short-term end or a resolution but we would like to see a deceleration or at least a form of stability in the short term, not an ever-growing crescendo of sanctions and tit-for-tat punishments.

“Under that type of environment, with stabilisation and having a more accommodative central bank policy and looser global financial conditions emanating out of the US, that can be a very fertile environment for emerging market asset classes.”