Our current views on emerging markets
While Emerging markets (‘EMs’) have underperformed Developed markets (‘DMs’) over the period 2011-2016, as we stand today there are clear and compelling opportunities in EMs. However, there are also countries facing stiff challenges and political malaise. The key is to be selective in what you own.
The challenges in EMs include central banks tightening – higher DM rates and less liquidity has historically been a headwind for those EMs with current account deficits (Latin America, ASEAN). Expectations about the pace and terminal value of the US rate cycle have been waning in recent months. Nevertheless, countries such as Brazil are battling to control the FX depreciation and inflation that has resulted from capital outflows. In several instances – again, like Brazil – this process is complicated by the political instability and populist backlash that can accompany an economic reversal. As we suspected, the market’s euphoria surrounding President Rousseff’s impeachment proved premature.
There are also those EMs who enjoy current account surpluses and who benefit from the improvement in growth implied by higher rates – notably the East Asian exporters (Korea, Taiwan).
Our current positioning:
• Buy global cyclical growth – especially in Korea and Taiwan
• Buy India for the domestic recovery
• Remain cautious on China as stimulus slows – own growth/consumer stocks
• Underweight Latin America – commodities, politics, economic malaise
• Avoiding Turkey; Mexico is looking interesting
Figure 1 below shows the Fund’s country positions as at end May 2017. This demonstrates the high-conviction approach we take to country allocation.
Figure 1: BT Global Emerging Markets Opportunities Fund – Wholesale country allocation end May 2017
The table below demonstrates our current views on four countries within the context of our five-point framework: three of our largest overweight (India, Russia and Korea) and our largest underweight (China).
The key point is that EMs, given their diversity, do not perform in the same way in a given environment. As always, there are countries that look very attractive at these levels. There are also those that you want to avoid. This is why a country-driven approach is crucial.