26th April 2016
We are in a sweet spot for emerging market (EM) assets says Blackrock’s global chief investment strategist Richard Turnill with selected opportunities and a window to outperform.
Can the sweet spot get sweeter?
EM-related exchange traded products (ETPs) have attracted nearly $16 billion this year, according to BlackRock research. and have recouped 75% of their 2015 outflows. The firm says the “short EM” trade is much less crowded than it was at the start of the year, and EM valuations are no longer unambiguously cheap says the firm yet fed tightening, a Chinese yuan devaluation or economic slowdown, and a renewed slump in oil prices are all risks to the EM story. We see the Fed remaining dovish through mid-year yet there are risks in the second half of the year as U.S. rates increase and China’s credit-fueled growth improvement slows.
Asking what would it take to get a sustained EM bull market, Turnill says: “We would need to see evidence of structural reforms addressing excess debt, industrial overcapacity and low corporate profitability, particularly in China. Policies currently supporting Chinese growth are actually increasing structural imbalances.
“We see value in EM currencies such as the Mexican peso. We generally favor EM local currency debt (especially in Brazil and Indonesia) over U.S. dollar debt. EM central bank rate cuts amid lower inflation should support many local rates markets. In equities we like India, given a nearing peak in the bad loan cycle, Mexico on structural reforms, and China based on near-term growth prospects.”