Emerging markets “have had their day in the sun”

14th May 2015

Investors should avoid emerging market equities this year as weaker commodity prices and a strong dollar continue to impact the asset class, Kames Capital’s chief investment officer Stephen Jones has said…

Far from looking like one of the more undervalued areas within the equities space following a lacklustre 2014, the asset class continues to face severe challenges this year.

For us 2015 is very much a developed market play in terms of equities. Emerging markets have had their day in the sun, and now they are being battered by a strong US dollar and weak commodity prices.

Emerging markets lost ground last year after a sharp sell-off in the summer caused by expectations the US Fed was preparing to hike rates.

There were some bright spots among the emerging markets last year, including India where the Sensex climbed nearly 30%. But with a few exceptions, emerging markets were the least attractive option for investors in any scenario that sees US interest rate rises delivered.

Last year India re-emerged as the place to be because, unlike most emerging markets, it is a huge energy importer, and enjoyed some positive political change.

So investors can point to India as a brighter spot, but certainly the majority of countries across Latin America, China and Asia look challenged.

Rather than focus on emerging markets, I expect 2015 to be dominated by Europe in particular, where returns have already met full year forecasts.

Certainly with central bank stimulus being applied aggressively, Europe and Japan, and to a lesser extent the UK, can all make progress, as investors look beyond fixed income for an attractive real return.

In particular, we favour European equities now that European Central Bank president Mario Draghi has shown the market the money and there is a shift in allocations taking place as investors who have been underweight European equities increase their positions.

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