Against the twin headwinds of the US presidential election and (supposedly) inevitable Federal Reserve interest rate increases, emerging markets are looking stronger than they have in a long time.
Economic growth is accelerating, inflation is close to an all-time low, and valuations aren’t nearly as stretched as in developed markets, says Marcus Svedberg, the Chief Economist for East Capital, which manages over $2 billion in developing countries.
Yet the global investor obsession with the US has a habit of knocking the stuffing out of even fundamentally strong markets – so which are the emerging assets to own and disown going into the second half? Here’s Svedberg’s hit list:
We like Russia a lot. It’s a classic case of something that’s coming back from a very low base. Growth is still negative, but it’s steadily improving. Inflation was very high but is coming down steadily. So, it’s not the absolute level, but it’s the trend; it’s the trajectory.
Donald Trump may seem more attractive to the Russians, but I actually think that a Clinton presidency would be better, not only for Russia but for the world. It’s the much more constructive agenda. It’s more open to trade. Trade is important for Russia.
In first half of 2015, when there was a risk of more sanctions and tougher sanctions, then very few investors wanted to invest into Russia. Now, the risk is they either stay – that’s the status quo – or they ease sanctions, either from Europe or the US. That’s a completely different risk profile, because now you have risk on the upside. I haven’t heard anyone talk about tougher sanctions, regardless of who wins the US election.
I think Europe will lift sanctions before the US does – possibly by the end of the year. Various countries have been pressing for the easing of sanctions as far back as December. American sanctions are different – they’re by executive order, so any president can lift them whenever he or she wants. We’re very unlikely to see them being lifted now, right before the election, or in the very first month after the election. They will both be lame duck periods. So I don’t think sanctions will be lifted this year, but I don’t think it’s going to matter too much for the market.
The economy is picking up. It’s recovering from a very low base. GDP is expected to turn positive this year. Inflation averaged close to 50% last year but is coming down to 15% this year. So, there is some momentum coming from that low base, but in order for investors to put their money there, you will have to see concrete results from this new government.
The fundamental problem is that the political elite – and certainly this government, but also parliament more broadly – remains oligarchic. There are a lot of vested interests and few real reformers. Credible reformers left the government a couple of months ago.
The new Prime Minister has reformist credentials from regional politics, but I don’t think investors or the IMF will give him or the new Cabinet the benefit of the doubt. They will have to show concrete results. Not only words and plans, but actual legal changes, legislation, before we’ll see any major payments from the IMF, or investors going in in any meaningful way.
This new government potentially has more political clout – they’re not technocrats like many of their predecessors. But I’ve been covering Ukraine for a long time. After the Orange Revolution, there were great promises, and then we just ended up with a lot of political in-fighting. And the to-do list is painfully long for Ukraine.
We like Argentina a lot. The economy, if you look at the numbers, is still very difficult. But with Mauricio Macri, the new President, not only winning the election but also actually implementing a lot of reforms very quickly – investors are really appreciating that. We saw this with the record bond sale a few weeks ago, and equity market is doing great, even though the macro fundamentals are very challenging. It illustrates that, with a credible reformist government, you can very quickly turn around investors to put the money to work again.
Kenya is one of the growth stars. There are imbalances, but the fact that they signed an IMF deal makes us more at ease because there is a reform anchor.
Nigeria could be very interesting, but they have to devalue the currency. Investors are just waiting for that to happen, and then I think a lot of people will be excited about Nigeria again. For now, no one wants to put their money in only to see devaluation days or weeks later.
India is a little bit tricky. It has been a darling among investors for a long time, with Modi coming in as a reformer. But he hasn’t really delivered on any major reforms yet – in stark contrast to what Macri did, for instance; not only promising but implementing. But the underlying economy is very good in India, with high growth, which is accelerating. Inflation is coming down. They have a very credible central bank governor.
Overall in Asia, there’s a lot of growth to be excited about. Even in China, where growth is decelerating, it’s not decelerating faster than what we thought going into the year. If there is a little bit of slack in the economy, they tend to stimulate through different mechanisms – which one can be concerned about, because that may aggravate the underlying debt problem – but from a growth perspective, it’s basically playing out as expected. And it’s the same with the currency: the currency is moving as expected, even though there was a lot of market concern at the beginning of the year.
For the full interview with Marcus Svedberg and Khanh Vu, director of Vinacapital in Vietnam, click here.