Successive rounds of melancholy and enthusiasm have characterised emerging markets over the years and the preceding few months have not departed from this pattern.
Negative factors such as rising US interest rates, a stronger dollar, enhanced global trade concerns and a possible rejigging of global supply chains have prompted a change in attitude. Slowing growth in China and Europe has merely added to the list of apprehensions.
A somewhat indiscriminate sell-off contributed to a bear market – a deterioration of over 20 percent – in EM equity between January and August. The equity market, measured by the MSCI EM index, is now down to 10.3 times forward earnings, from 13 times, with trailing earnings growing in double digits annually. While this ebbing tide has lowered all boats, the upside is that this has produced attractive entry points for some emerging market countries.
Several situations merit scrutiny. For example, Brazil’s political direction has changed following the presidential election victory of Jair Bolsonaro in October. Markets rallied in the run-up to the votes and in their immediate outcome. But the days when Brazil was the twinkling star of the BRIC’s (Brazil, Russia, India and China) seem long passed. After riding the wave of the commodity super-cycle during most of the 2000s, growth has been subdued since 2011.
Turkey and Argentina, which have meanwhile seen sharp depreciation in their currencies, and may be seen as bargains. Argentina passed an ambitious 2019 budget that targets a fiscal balance before interest payments, and some support has returned. The peso gained 10 percent in October and bonds rallied after an improved IMF deal and a more orthodox monetary policy.
Turkish assets have also rebounded but challenges remain. If policies were put in place to provide sustained macroeconomic re-balancing, the equity market has the potential to double.
Yet, instead, the deceleration in growth will be marked and foreign financing needs remain elevated. With public and private debt redemptions now totaling about $65bn for 2019. Yet neither Argentina nor Turkey is out of the woods yet and risks continue to run high.
Powerful trends continue to play out in emerging markets, such as the enlargement of the middle class in Asia. In the next seven years, another 1bn people are expected to join the emerging middle class. Of this, about 90 percent are expected to be Asian, of which about 500m will be Indian and 300m Chinese.
This should continue to reinforce not solely the custom and infrastructure sectors across Asia but likewise the materials and commodity-producing countries, such as Brazil and Russia. These broader themes will help ensure that emerging markets provide compelling investment opportunities in the forthcoming years.