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On the radar

Emerging problems

Emerging problems

Stephanie Hawthorne
Tuesday 15th May 2018

After a five-year hiatus growth has returned to emerging markets, but could steel tariffs and US interest rate rises bring the dark days back? Stephanie Hawthorne reports

Emerging market equities bounced back in 2016 and 2017 after five difficult years. Underperforming developed market equities by almost 50% in US dollar terms has become a distant memory, but new clouds are gathering on the horizon.

US President Donald Trump’s new tariffs on steel and aluminium imports have heightened fears of a trade war, while there are concerns that expected rises in interest rates by the Federal Reserve could spook markets further.

More than 50 economies around the world, including frontier markets, are classed as emerging. These encompass the BRIC countries – Brazil, Russia, India and China – as well as Mexico, Indonesia, Nigeria and Turkey, a group known as MINT. Clearly, the term emerging markets embraces a variety of regions and sectors with no two markets identical in performance, but all tend to be volatile and high risk.

Yet emerging markets, as defined by MSCI, are dominated by a narrow set of countries with concentrated risks. China, South Korea and Taiwan are almost 60% of the MSCI Emerging Markets index. Financial services firm Barings points to some 70% of that index comprising information technology, financials, consumer and healthcare companies. All of these sectors are expected to enjoy secular growth as they remain under-penetrated and will be beneficiaries of the ongoing expansion of the region’s middle classes.

Indeed, the International Monetary Fund (IMF) expects emerging and developing economies to grow 0.2% during 2018 to 4.8%. This compares to expectations that the US economy will remain flat at 2.1% this year.

“Emerging and frontier markets combined are five times the population and growing twice as fast as developed markets,” says Marshall Stocker, Eaton Vance’s EM portfolio manager, who believes that population growth is not the only reason to look at the developing world.

“The S&P 500 is 50% more expensive (on a PE basis) than emerging and frontier equity markets while earnings are likely to grow at similar rates,” he adds.

Also bullish is Invesco Perpetual’s emerging market equities fund manager Nicholas Mason. “Companies are delivering on the earnings front and 2018 could be the first year since the financial crisis that the global economy will be operating at or near full capacity. “Economic growth in the emerging world should continue to be solid and inflation remains more or less under control,” he adds.

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