Bullish outlook for emergents
Despite a recent sell-off in emerging market equities, a bullish outlook still persists among them because of improving economic growth momentum, handsome profit margins and accommodative monetary policies, says Credit Suisse.
“Looking through the unsettling volatility of the current US-China trade dispute, we argue that the fundamentals for the asset class [emerging market equities] remain sound,” said Alexander Redman, the London-based head of global emerging market equity strategy, global markets division.
“We believe we are only mid-cycle in the current bull phase for emerging equity [in terms of ] absolute and relative performance, and as such retain an overweight recommendation on emerging markets within a global equities portfolio.”
There are several attributes supporting such sanguine prospects, said Credit Suisse.
An uptick in the relative real GDP growth differential for emerging (over developed) economies is typically consistent with emerging equity outperformance of developed markets, said Mr Redman.
He said the relatively nascent recovery in emerging markets’ non-financial net profit margins and overall market return on equity are expected to propel sustained and uplifting profitability among these economies.
“We anticipate 2018 to herald the start of a fresh emerging markets’ capacity expenditure cycle — emerging market corporations are now on the cusp of underinvesting and are flush with free cash flow. We believe emerging markets’ capital spending will be supported by an acceleration in US appetite for corporate spending,” said Mr Redman.
Monetary policies of emerging markets are still broadly accommodative with selected scope for real rates to ease.
With emerging markets’ real rates at +1.5% versus -1.2% for developed economies, there remains room for an absolute (and relative) decline in emerging markets’ real rates in this cycle, he said.
“We no longer believe it to be inconsistent that emerging markets’ real rates can converge with normalising development markets’ rates as external positions for emerging economies have improved significantly after the taper tantrum [of the US Federal Reserve’s monetary stimulus programme],” said Mr Redman.
China’s real estate inventories have been significantly drawn down, while the position of Chinese residential real estate inventories’ with unsold housing starts having moderated to 21 months’ worth of annualised sales versus the 16-year average of 24 months, he said.
“With supply tightening we are unlikely to see an aggressive slowdown in the momentum of house prices,” said Mr Redman. “We recommend being overweight in China, India, Mexico, Malaysia, Indonesia and Turkey in a dedicated emerging market equities portfolio, funded by underweights in Taiwan, Brazil, Russia, Thailand and Chile. We are benchmarking on South Korea, South Africa, Poland and the Philippines.”