Continuing pain foreseen for emerging markets

Continuing pain foreseen for emerging markets

Continuing pain foreseen for emerging markets Emerging markets have gained massive ground from end-January to October this year, but they are once again retreating as money managers see more hurt in store, according to an article from the Globe and Mail.

Following a record US$6.4 billion pullout from emerging bond funds tracked by JPMorgan and an emerging equities selloff that neutralized a third of year-to-date inflows, attendees of this year’s Reuters Global Investment Outlook Summit shared a somber mood. The mass exodus occurred amid investor speculation that US President-elect Donald Trump would follow through on his protectionist and expansionary policy pronouncements.

“For us, Trump has been a game-changer for emerging markets,” said NNIP chief strategist Valentijn van Nieuwenhuijzen, whose firm has reversed gears from the bullish position it adopted near the end of 2015.

A Merrill Lynch investor survey conducted immediately after the Nov. 8 election revealed the biggest month-on-month drop in equity allocations in five and a half years. Bhaskar Laxminarayan, Asia CIO for Julius Baer, reported that 90% of his firm’s global equity portfolio is allocated toward developed markets. “We’ve achieved peak globalization … If you have a couple of years of this to play out, that’s not the best time to be in emerging markets,” he said.

The greenback has also risen 5% to reach 14-year highs since the election, reversing a fall that coincided with this year’s developing market rally. But there is a bright spot, according to UBS Wealth Management CIO Mark Haefele. “Commodities are stabilizing, [and] we’re now seeing earnings growth in emerging market companies… on the equities side, emerging markets can continue to move forward,” he said – which can be beneficial if Trump’s infrastructure plans lead to a resurgence in demand for commodities.

The outlook is different for debt. Increased US yields would reduce the appeal of emerging market debt, and it would make rolling over maturing debt or raising fresh finance costlier. Haefele referred to emerging debt as “ground zero” in case additional US rate hikes occur unexpectedly.

Not all managers are rushing for the exits. BlackRock’s fixed income CIO Rick Rieder called emerging markets “a great opportunity” for 2017, while other managers cited intrinsic potential in parts of the developing world and additional Mexican competitiveness enabled by a massively depreciated peso.

Some are keeping the faith while waiting for market turbulence to subside. “When we look to 2017 and look at parts of markets that should perform, my sense is emerging equities, currencies will be good to be in,” said GMA Investment Solutions Group Head Larry Hatheway. “It’s just a not-for-now story.”

Related stories:
Where to invest in the Trump investment landscape
What will Trump’s policies mean for Canada’s future?