Safety first in emerg­ing mar­kets

Financial Mirror (Cyprus) - - FRONT PAGE -

2) More­over, the fun­da­men­tals of emerg­ing economies con­tinue to im­prove.

Af­ter the 2013 “taper tantrum” and com­mod­ity bust from 2014 on­ward, many EMs saw their ex­ter­nal po­si­tion sharply worsen and so the ad­just­ment pe­riod re­quired a con­trac­tion in do­mes­tic de­mand. That process seems to have run its course. The ex­port cy­cle looks to have bot­tomed out and PMIs in many economies are again ris­ing. As such, the con­di­tions are ripe for growth in emerg­ing economies to rise at a faster pace than in de­vel­oped economies—an es­sen­tial con­di­tion for a sus­tain­able pe­riod of EM eq­uity out­per­for­mance to restart. Such im­prov­ing fun­da­men­tals are lead­ing to (lo­cal-cur­rency) up­grades in com­pany earn­ings fore­casts.

3) Any US bond market sell-off will likely be con­tained.

The re­cent uptick in longer-term US yields can largely be ex­plained by the oil-driven rise in in­fla­tion break-even lev­els. Yet, for a va­ri­ety of rea­sons, which tend to pro­duce rare agree­ment among Gavekal part­ners and an­a­lysts, oil prices are un­likely to rise much above US$50 a bar­rel. There­fore, any rise in trea­sury yields, with an as­so­ci­ated curve steep­en­ing (say 10-year yields at 2-2.5%), should be seen merely as a “re­set” which low­ers ex­pec­ta­tions about fu­ture re­turns from yield-chas­ing, with­out fully chang­ing the en­vi­ron­ment.

While these three fac­tors should, in the­ory, be con­ducive to solid EM eq­uity per­for­mance, my pref­er­ence re­mains for EM bonds. Changes in market phases can be vi­o­lent and EM bonds of­fer a bet­ter sanc­tu­ary should in­vestors be pro­cess­ing an end to the lat­est liq­uid­ity-driven party.

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