It is an interesting time for emerging markets. Growth in Europe is accelerating which is good news ...
It is an interesting time for emerging markets. Growth in Europe is accelerating which is good news for Eastern Europe. In the US, interest rates look close to peaking and growth remains positive, which is helping Latin American economies, particularly Mexico.
Stronger growth in Japan has benefited Asia and emerging Asian economies have now recovered enough to bring some self-sustaining growth.
The entry of China into the World Trade Organisation (WTO) will provide further support. The move by global funds towards an ACWI free index (All Countries World Index) which has a 6.6% weighting in emerging markets should add liquidity to the whole emerging market asset class.
The main beneficiaries will probably be the larger more liquid markets with global blue chip companies, where global comparisons can be made on valuation and quality.
Against this buoyant news we could see further volatility in the asset class, as there is always a risk of higher US interest rates slowing US growth and creating a hard landing.
Certain themes continue to dominate. Emerging markets are continuing to profit from strong commodity prices.
For example, Russia, Mexico and Venezuela are benefiting from the recent increases in the price of oil. The technology, media and telecom sector, which makes up over 35% of emerging markets, has been another prime area of performance.
Within Latin America our favourite country is Brazil, which is seeing stronger than expected economic growth and falling interest rates.
Expectations of pension funds entering the equity markets (most money is currently is in bonds) and a potential debt upgrade should add support in the longer term.
Although Mexico has had a successful free election and the economy is showing strength it is over 90% correlated to the Nasdaq at the current time, which makes it vulnerable to any sell off in the US.
In Europe, Middle East and Africa (EMEA), Russia should benefit from better than expected economic data, high oil prices and hopes of further structural reforms following the election of Putin. In Asia, China continues to be of most interest where there is evidence of strong exports and government investment.
A loose monetary policy and a wage increase implemented late last year are also leading to much higher consumption.
Almost half of China's GDP is made up of consumption, which should have a major positive impact on growth.
We take a positive view on a fundamental basis of many companies in the emerging markets sector, which, although fairly valued on a historical basis, still look relatively cheap against companies in the developed markets.
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