Strong rebound on the emerging markets forecast

Positive mood pervades investment summit

LONDON/NEW YORK: After a miserable few years, emerging markets are in line for a strong rebound in capital flows next year, some of the biggest investors predicted this week, although they warned benefits will not be shared evenly.

Speakers at the Reuters Global Investment Outlook Summit this year were mostly positive about emerging market prospects. In contrast to the gloom pervading last year’s summit, the worst fears of a Chinese hard landing appear to have ebbed, while steep declines in asset prices may have opened up value.

Losses of up to 30 percent in currencies such as the Brazilian real and Malaysian ringgit against the US dollar have also convinced many delayed economic adjustment is under way.

“Emerging as a theme is back going into next year,” Pascal Blanque, who oversees $ 1 trillion at Amundi Asset Management, told the summit.

“We will see inflows moving back into the so-called emerging space on a discriminatory basis. I am seeing appetite growing to play the combination of cheap currency and growth rebalancing.”

Blanque’s “conviction” trade in emerging markets, driven by belief in a soft landing in China, is ASEAN, the Asian trade bloc of Indonesia, Malaysia, Thailand and the Philippines.

A turnaround, if it materialises, will ironically come during a year when many reckon the US Federal Reserve will be raising interest rates.

But Fed tightening looks likely to be less hawkish than anticipated and will be countered by policy in Europe and Japan where, Blanque says, “unlimited” stimulus is forthcoming.

Earlier this month it was reported big asset managers had started to raise emerging market allocations, believing the selloff had gone far enough.

The new-found bullishness is also partly down to signs of recovery in Western consumer demand as central bank stimulus and lower oil prices feed through to spending power.

Percival Stanion, head of multi- asset at Swiss firm Pictet, predicts retailers will enjoy bumper Christmas sales after several lean years, in turn benefiting manufacturing hubs such as China and Korea.

With its growth premium to richer peers hitting 16- year lows, the developing world will see the first net capital outflow this year since 1988, according to the Institute of International Finance.

Many remain cautious – Bonnie Baha at DoubleLine Capital in New York sees more pitfalls ahead, especially from the stronger dollar. But others see value beneath the rubble.

Aberdeen chief information officer Anne Richards, for instance, predicts double-digit equity gains next year.

Similarly Mauro Ratto, head of emerging markets at Pioneer, expects “nice single-digit returns” on emerging markets bonds, betting many countries will have room to cut 2016 interest rates.

Summit participants were unanimously bullish on India, for example and considered Brazil too risky.

Rick Rieder, chief information officer of fundamental fixed income for BlackRock, said in New York that some developing sovereigns compare favourably with parts of Europe.

Amundi’s Blanque said rather than buying emerging market assets en masse, investors will focus next year on markets that can capitalise on domestic demand rather than exports, and are seeing economic growth recover. – Reuters