2018 Emerging Markets Mid-Year Outlook: A Multi-Year Recovery
We see the recent volatility in emerging market equities as an opportunity to increase our positions in high conviction ideas. Broadly, we believe emerging market economies still benefit from a much larger structural growth opportunity than their developed market peers.
• China- The US and China trade dispute has recently dominated headlines and affected investor sentiment. The impact of tariffs on $50 billion worth of Chinese products should have a limited impact on China’s GDP. However, if further tariffs targeting $200+ billion worth of Chinese goods are imposed, this will likely create an overhang for markets in the near-term. As such, we are shifting our portfolio exposure to strong domestic demand plays which we believe will be more resilient should trade tensions escalate further.
• India- The implementation of India’s goods and services tax last July caused some transitory disruptions to the economy, but there has been a steady recovery in subsequent months. Key macro indicators, including imports and auto sales figures, point to strong underlying demand. Private consumption expenditure has also remained robust and more recently, we have begun to see signs of a revival in investment activity.
• Brazil- Brazil started the year on solid footing as one of the best performing EM countries and we are taking advantage of the recent pullback to build larger positions in our high conviction names. The market retreated sharply on account of a combination of recent USD strength, the trucker’s strike leading to GDP downgrades, less conviction on economic reform, and mixed political polls. However, we remain optimistic on Brazil for the second half of the year on account of significantly lower interest rates translating into increased borrowing and a new capex cycle.
• Russia- The Russian equity market pulled back dramatically in early April following the US’ announcement of sanctions and increased tensions in Syria. With that said, we are still positive on Russia due to the strong near- and medium-term outlook for oil prices, a sound economy going through an impactful easing cycle, and a corporate sector that has been under sanctions since 2014 and did not have to make any dramatic adjustments to operations.
Investment Considerations — There can be no guarantee that any strategy (risk management or otherwise) will be successful. All investing involves risk, including the potential of loss of principal.
Emerging Markets Risk — The risks of foreign investments are typically greater in less developed countries, which are sometimes referred to as emerging markets. For example, political, legal and economic structures in these country may be changing rapidly, which can cause instability and greater risk of loss. These countries are also more likely to experience higher levels of inflation, deflation or currency devaluation, which could hurt their economies and securities markets. For these and other reasons, investments in emerging markets are often considered speculative. Similarly, investors are also subject to foreign securities risks including, but not limited to, the fact that foreign investments may be subject to different and in some circumstances less stringent regulatory and disclosure standards than U.S. investments.