Can the emerging markets show go on?

CAN emerging markets, slated to rise a further 8%, perform amidst gyrating US markets and increased geopolitical tensions?

Problems plagueing the US markets include remarks by president Donald Trump, worries over tax reform and stock overvaluations.

Adding to the list of concerns is the situation in North Korea.

“Recently, sentiment in emerging markets has, to some degree, been independent of that in US markets, largely due to the buoyant Chinese and Hong Kong markets.

“This will likely remain so, unless there is a major downturn in the US markets,’’ said Thomas Yong, the CEO of Fortress Capital.

A benign trajectory for profit growth should boost the MSCI Emerging Markets Index by 8.3%, reaching 1,150 by the end of June, according to a Bloomberg report.

This index has already notched an 18-percentage point gain over its developed counterparts in the past year and a half.

“Obviously, when global growth is sustainable, funds will turn to emerging markets for better returns. So long as there are no major events that might pose risks to growth, emerging markets would continue their uptrend with equities riding on the upside,’’ said Danny Wong, CEO, Areca Capital.

“In general, US market valuations are on the high side. I expect some funds will take out money from the US if there are potential risks to the market. However, increased geopolitical tensions may dampen sentiment and may require a riskoff strategy.’’

Bloomberg has reported that developing economy equity funds recorded US$1.6bil of outflows the week ending Aug 16.

However, investors have the firepower to increase exposure to developing economy assets in the months ahead, Bloomberg said, adding that Credit Suisse is “overweight” on China, South Korea, Russia, Indonesia, Malaysia and Poland.

In the case of Malaysia, the potential upside would be based on improved earnings.

“Forward price to earnings ratio appears blocked from marching higher than 16 times, which represents the FBMKLCI at about 1,800. It has tried to break significantly above that level about five times since 2007 but failed each time,’’ said Pong Teng Siew, head of research at InterPacific Securities.

Posing a challenge for emerging markets is a warning of downturn for global markets.

HSBC, Citigroup and Morgan Stanley see mounting evidence that global markets are in the last stage of their rallies; the signals include the breakdown of longstanding relationships between stocks, bonds and commodities, and investors ignoring valuation fundamentals and data.

Inflation remains well below their 2% targets, giving rise to questions if monetary tightening is the right course to pursue.

“While consumer prices have remained relatively benign, asset prices have continued to rise; the Dow Jones Industrial Average is up by almost 20% year-on-year, and the S&P 500 index is 13% above its level a year ago,” noted Nor Zahidi Alias, the chief economist of Malaysian Rating Corp. In view of this, the US Fed is likely to continue pushing up its policy rate, at a measured pace, in the next year or so, according to Zahidi.

Central bankers, especially in major economies, are trying to understand why growth recovery and improving job markets are not translating into higher wages and price inflation, noted Suhaimi Ilias, the group chief economist at Maybank Investment Bank.

“This has given rise to views that the current low inflation could be temporary, and raises the risk that it could be more persistent.

“If so, the US Fed’s interest rate hike of three increases per annum totaling 75 basis points for 2017-2019 may be too optimistic. Markets are pricing in a lower quantum of Fed rate hikes from now until the end of 2019,” said Suhaimi.