The correction seen in emerging markets this year could represent a buying opportunity for investors, according to Valentijn van Nieuwenhuijzen, chief investment officer at NN Investment Partners, who says fundamentals remain strong in the sector despite the fall in share prices.
Emerging markets was one of the sectors most heavily tipped by analysts at the start of the year and its MSCI index closely followed the performance of its global counterpart in 2018 up until the beginning of May.
However, the combination of US rate hikes and subsequent dollar strength, a rising oil price and increased trade fears created what van Nieuwenhuijzen described as “a cocktail where capital was less willing to stay in emerging assets”. The MSCI Emerging Markets index is now down by 4.7 per cent so far in 2018 while the MSCI World index is up 2.19 per cent.
Performance of indices year to date
Source: FE Analytics
Despite this, van Nieuwenhuijzen is not concerned about the outlook for the sector.
“In terms of where inflation is, where labour market trends are, where imbalances are in terms of government finance or current account balances, we are not yet too worried in terms of the macro-dynamics in the emerging world,” he explained.
“The underlying fundamentals have not derailed that much. There are individual stories in the individual countries, but inflation is well-contained and growth is pretty OK in most emerging markets.
“If you see what has happened to risk premia now in many of these emerging market assets, they are becoming attractive.”
Van Nieuwenhuijzen (pictured) is not the only one who believes emerging markets are oversold.
Ashmore Group's head of global research Jan Dehn recently told FE Trustnet that the correction in emerging markets had more to do with profit-taking due to the strength of the dollar than economic or corporate weakness.
He pointed to the IMF’s World Economic Outlook which predicted that GDP growth in emerging markets is set to stabilise at around 5 per cent by 2022 compared with 0.8 per cent in the developed world.
Chris Beauchamp, chief market analyst at IG, agreed that the short-term headwinds buffeting emerging markets shouldn’t distract investors from the fact that “synchronised global growth isn’t going away over the long-term”.
“We should expect some weakness in emerging markets, but it probably represents a buying opportunity at this point,” he said.
However, van Nieuwenhuijzen is biding his time before buying back into the sector and said that just because it has fallen substantially from its peak, this doesn’t necessarily mean a better buying opportunity won’t materialise later in the year.
“I think we will be looking to adding into both [emerging market bonds and equities], but it’s now very much timing and assessing where are the politics around trade developing, where are the capital flows going for investors and what is generally happening to overall sentiment surrounding the sector,” he said.
“Near term, I do not expect a quick recovery but I think that maybe you have to be a bit more realistic. We are closer to the end of the year, the first half was more problematic than we foresaw at the beginning, but we would still expect to see a positive return.”
Van Nieuwenhuijzen’s colleague Marcelo Asselin, head of emerging market debt at NNIP, said there is reason to be particularly confident in a rebound in his area of expertise.
The manager pointed to a recent survey of professional investors conducted by NNIP, in which 72 per cent of respondents said they expect to increase exposure to emerging market debt over the next 12 months, including 10 per cent who expect the increase to be dramatic. Only 9 per cent expect a decrease.
For those who are reluctant to raise their exposure to the sector, the two main areas of concern are interest rate risks and a potential China slowdown. However, Asselin said both of these have been overplayed.
“Regarding the former, we are very close to a level at which we expect US yields to stabilise, because the market has already priced in a very realistic scenario for monetary normalisation over the next few years. Therefore, we expect rates to rise more gradually, which will have a less dramatic effect on the performance of emerging market debt,” he explained.
“We believe that the probability of a hard landing by the Chinese economy is significantly low in the near term. China will continue to grow at a robust pace as the focus of its government shifts from speed of growth to achieving greater quality. These factors are supportive far investments in emerging markets.”