The future evolution of emerging markets is inexorably linked to three variables: trade policies applied by Donald Trump with respect to these countries, the strength of the dollar, and the pace of rate hikes by the US Federal Reserve. And experts still have doubts about their evolution, due to uncertainty about the US president's future policies.
"The key variable for the returns and the evolution of emerging currencies is the dollar. The initial reaction to Trump has been one of strength but we do not know if this will continue, it will depend on politicians," said Nicholas Field, Emerging Markets Equity Manager, at a Schroders event with reporters in London. "If rates rise in the US, that money could come from the emerging world," warned Ugo Montrucchio, Multi-asset Manager at the fund management company, but he also indicated that another variable could enter the equation: if investors associate inflation – which is what forces such rate increases – to more growth, the effects on developing markets could be positive.
In this environment of uncertainty, one thing is clear: after three years being underweight in emerging markets in the management company’s multi-asset portfolio, the scenario is now beginning to be favorable for investment, and always with very selective and active management, which is the most sensible in a scenario in which dispersions are once again strong.
But, let’s not forget, with the uncertainty... also between the two, of whether it will be emerging equities, or fixed income that will do better. "For some weeks the markets have been immersed in the reflation story. For me, the dilemma in 2017 is whether there will be a very rapid reflation, in which consumption and growth will accelerate, or all expectations of inflation and growth will lead to a world in which restrictive monetary policies by the Fed Will dilute that growth by mid-2017. The bias is now toward emerging equities, where we see more potential than in fixed income, but as we enter into the new year, everything will depend on US policy, and on the reaction of central banks," says Montrucchio.
Field points out the attractive valuations of emerging equities, where the question is how much each country has adjusted their account balances, and where he sees opportunities in markets like Brazil (the country where to increase exposure). Although negative in Mexico and South Africa, he believes that this last market could be the turnaround story of 2017, just as the Rio stock market has been this year. As regards China, the vision is not too pessimistic because, despite the heavy debt it faces, it has adequate mechanisms, says Field. He declines to comment regarding trade relations with Trump and the problems that could be derived from this aspect, as currently all you can do is speculate, he says.
And emerging- markets’ debt?
For Jim Barrineau, Co-Head of Emerging Markets Debt Relative Return at Schroders, if the reflation story wins, it will probably benefit stocks to the detriment of emerging debt, but "if we see rate hikes that go too far and too fast, there could be significant opportunities in fixed income," he explains.
The expert, who reminds us of the strong returns seen in 2016 in some emerging debt segments, argues that if global debt markets remain stable, the search for profitability in emerging markets will continue. And points out positive points for the asset, such as currency valuations (which despite having regained ground in 2016 after the falls of recent years, are still below their peaks) or the recovery of commodity prices, which can benefit many countries in Latin America (except Mexico), not to mention that the markets have already priced-in a US rate hike in December and two next year.
Among the markets with more opportunities, and which can play the reflation story, is Brazil, less affected by the Trump policies, as well as some in Asia. In general, his proposal focuses on debt with low duration, and outside the investment grade segment, that is, in high-yield, where he sees much appeal. And always, with active management: "When investing in emerging debt, passive management does not make sense," he says.