By Kerry Craig
A primary reason for poor EMD performance last year was obviously tapering worries, but also concerns about growth in China (government trying to control flow of credit) and weak demand for energy resources (weighed on commodity countries like Brazil). Significant political upheaval creating uncertainty across emerging markets did not help matters.
Since that initial knee jerk reaction from investors in May/June when EM was indiscriminately sold off, we have seen some cautious return to risk with currencies moving back up quite a bit and equity markets rising.
What 2013 did for EMD is essentially create value. For those taking some risk in 2014 that means opportunity, although with a cloudy outlook for continued see-sawing over Fed tapering and rising interest rates. The more liquid areas were hit harder (such as dollar denominated debt), and that is looking relatively more attractive compared to the less liquid areas that were to some extent shielded from the sell-off last year, such as corporate EM debt. This means areas like hard currency have more room to come back.
USD EMD spreads over Treasuries are attractive and represent good value when you consider the relatively good credit rating of many of these countries.
In both developed and emerging markets, equities and debt, we’re finding investors are going to have to be more selective this year. That is most true of EMD when you look at situations like the Fragile Five debtor nations juxtaposed with those such as Taiwan, China, Thailand or Korea, where economies geared to recovering economic growth suggest best return potential.
While you could argue that a stronger US economy means higher rates, which could negatively impact these economies and assets, the growth in the developed world should start to pull up some EM economies.
In terms of investors returning to the space, likely first we’ll see institutional investors reallocating and then the retail flows may follow.
Kerry Craig is global market strategist at JP Morgan Asset Management
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