The emerging markets is seeing robust growth, suppressed inflation and improving currency account balances thanks to a weak US dollar and recovering commodity prices.
There could be a few dark clouds on the horizon. Politics impacts asset prices. The outcome of an election can cause market uncertainty as well as change a country’s economy and its relationship with its creditors.
There are more than 20 elections in the emerging markets this year, which could mean new leaders in countries such as Russia and Brazil.
“The EM election cycle will undoubtedly bring plenty of unexpected political twists over the coming 12 months, resulting in heightened market uncertainty and asset price volatility,” says Paul Greer, senior trader emerging market debt at Fidelity International.
THE END IS (NOT) NIGH
Another concern that some investors might have this year is a fear that the world’s economic expansion is maturing, but Coles does not believe that it will come to an end this year.
“I don’t think that this cycle will automatically come to an end,” he says. “I think that this is going to be a long one.
“The clock is not a valid sign,” he adds. “You would need a meaningful rise in interest rates or bond yields to cause a financial accident somewhere in the credit markets that spills over into a recession.
“Valuations on bonds look rich and will, to our mind, guarantee a negative real return, which means you just get poorer. We have a regulatory backdrop that forces pension funds and insurers to buy bonds.
“It strikes us that it is unlikely that you will get big enough rise in bond yields that de-stabiles the valuation approach to equities, particularly in an environment where earnings for those cyclical sectors look set to surprise. So we have a preference for equities and for cyclicals.
“I can’t see how you get such a big rise in bond yields when most people who are free agents that have the ability to sell have probably done it.”
If the cycle does end in that growth is not as strong as expected and inflation rises higher than believed then Aviva recommends that long-dated US government debt could look an attractive option. But the asset to avoid this year is cash.
“Holding on to equity positions seems wise and I still struggle to see a role for cash other than for the occasional market spasm which are, by their nature, almost impossible to predict,” Jones says.
“The penalty, should you get caught in cash, remains high relative to the yields available in equities and, dare I say, in bonds,” he adds.
