Attention in the financial markets is slowly shifting towards emerging markets given the opportunities up for grabs. After a torrid 2018, focus has shifted towards developing economies as risks posed by a rising dollar and higher interest rate continue to edge lower.
Emerging Markets Growth
According to Europe’s largest asset manager Amundi, investors should focus more on emerging markets, as there is room for appreciation in most currencies. The firm expects earnings growth in such markets to be in the 5% to 7% range this year. It thus does not come as a surprise that the likes of Goldman Sachs Group and Morgan Stanley have also started taking a keen interest on developing economies.
The change of investment tact comes on growing belief that easing trade tension as well as a less hawkish Federal Reserve will be good for emerging economies. Supporting the sentiments is a 1.9% rally of the MSCI Emerging Markets Index, which keeps track of emerging markets
Emerging markets were hard hit in 2018 as the dollar continued to gain ground against the majors. The Federal Reserve increasing interest rates three times, triggered some form of fear in the markets, especially in the stock markets.
The thing with higher interest rates is that they force investors to switch their attention to high yielding securities such as bonds as opposed to stocks. The Federal Reserve indicating it will go slow on interest rates in 2019 appears to have reinvigorated investor’s interest in stocks once again. The stock markets have since bounced back after coming under immense pressure in the last quarter of 2018.
While the threat of strengthening dollar has diminished, emerging markets still have to navigate a string of emerging issues, especially on the global scene. Top on the list is growing concern over the health of the global economy amidst slow growth concerns. According to Amundi, the likes of India, Russia, and Chile remain well positioned to shrug off the emerging headwinds given their solid fundamentals.
Amundi Chief Investment Officer, Pascal Blanquette, says they are also maintaining close watch on stocks and bonds especially in China, Indonesia, and Brazil. According to the executive securities in the countries’, continue to offer high yield with sustainable levels of debt and earnings.
The investment firm is also bullish on central banks that are more than ready to cut interest rates in a bid to counterbalance signs of economic growth slowdown. Amundi expects trade war concerns, pitying the U.S and China, to subside a move that should support rapid growth especially in emerging markets.
“Assuming that we don’t enter recession in the U.S., slowdown is good news” because it would mean the Fed is more likely to pause in its tightening cycle. A full-blown recession would be a challenge for emerging markets,” Amundi in a statement.
Even though emerging markets continue to offer better value proposition when it comes to investment opportunities, there are still a number of markets one ought to avoid. Top on the list for Amundi are Turkey, South Africa, and Argentina given their rising deficits.
Amundi has also warned of the need to be cautious about investments in Mexico. The border wall standoff with the U.S according to the firm could lead to deterioration of relations something that could hurt investment opportunities. In addition, the likes of Nigeria and South Africa also pose significant risks gearing up to general elections.
The investment firm is however not worried about India even with general elections are on the Horizon. The country according to the firm has made key fiscal reforms that should continue to support growth in various sectors.