It is to no surprise that capital inflows over the past years have diverged towards emerging markets (EM). The search for yield, led investors to shift their assets into such zones despite the fact that risks of governance, political uncertainty, volatility in commodity prices and liquidity remain the major risks in emerging countries. Delving deeply turns to be quite a bumpy ride yet interesting.
What is the outlook for the second half of 2017?
When looking at the current data in developed economies, it seems that the improving momentum maintained its pace. Such positivity tends to be supportive for EM countries in terms of exports. In turn, we should see better GDP figures from EM countries.
In Latin America for the rest of 2017, the outlook seems positive, as we should see a recovery in Brazil, Argentina and Mexico.
Following a fall in commodity prices every year since 2011, this year we should see a stabilization in prices and this is definitely a plus for those countries who are net exporters of commodities. This will eliminate a major drag on growth and should allow investment to recover. Forward growth figures for 2017 are pointing towards 1 percent, 2.2 percent and 2 percent for Brazil, Mexico and Argentina respectively.
Furthermore, at the same time we should see a stabilization in currencies, which in turn should push inflation lower and stay close to central bank targets.
In the case of Brazil over the past weeks, the country has been going through another political turmoil, the second one in less than three years. This led to pressures on valuations, while it triggered few downgrades by leading rating agencies. That said, from an economic perspective over the past months we have noticed an improvement in economic data, with mainly lower inflation figures. Thus despite we might experience some softening in quarter two figures, we should not experience downturns as we did in 2016.
In Emerging Asia, a pick-up in exports is one of the prime factors why we should see some consistent growth figures, despite the fact of possible domestic headwinds. Indonesia should maintain its 5 percent growth. Other than that, we should see an uptick in property prices following the successful tax amnesty program, which the Government had announced in 2016.
In Emerging Europe, the stabilization in commodities should primarily benefit Russia which should turn GDP growth to a positive of 1.5 percent from the -0.2 percent in 2016. Whilst in Turkey following last year’s coup, we have experienced a remarkable improvement in valuations with now few room for attractive hard currency assets. Growth in Turkey should be around 4.3 percent following the recovery in tourism. For readers’ sake, tourism is one of the largest component of growth in Turkey following agriculture and textiles.
All in all EM should continue to do well in the coming years. As I have pointed out in previous writings fundamentally EM countries are better positioned from a fundamental perspective when compared to developed nations. In this regard we should continue to see capital inflows. The only aspect that seems to be a concern for investors is the possible re-strengthening of the dollar. That said while the Fed is likely to continue tightening, neither higher US interest rates nor balance sheet reduction should cause major strains in EMs. Interestingly enough latest data shows that increases in US interest rates in recent quarters have coincided with a slowdown in capital outflows from emerging markets.
In my view, having an exposure to EM within a portfolio is important. The convergence gap preposition of developing economies to developed economies is still in place and this is one of the reasons why EM countries register higher growth rates. In economic terms, capital and labor deepening is still possible in EM, while in developed economies only technological progress can trigger high levels of growth. A word of advice; be exposed but with caution.
This article was issued by Jordan Portelli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.