Fund managers bullish on emerging markets

NEW YORK: A number of global fund managers say they are buying emerging market assets for 2017 after the beating the sector has taken since the US election in November, even though credit rating agencies have a less positive outlook.

Since the election of Donald Trump as US president, emerging market stocks are down nearly 7%, based on the Morgan Stanley Capital Index, and the yield spread of emerging market bonds over benchmark US Treasuries is wider by 10 basis points, reversing some of the gains seen earlier in the year.
On Nov 8, the date of the US election, the EMBI Global year-to-date total return was 14.04%, and a week later, on Nov 14, it had halved to 7.6%.

Currencies such as Mexican peso and the Turkish lira have tumbled 10% or more in the wake of the election.

US President-elect Trump has pledged to impose protectionist trade policies and restrict immigration, which would likely damage most emerging market economies.

The Washington DC bank lobbying group, the Institute for International Finance, reported this week that US$23 billion (RM103 billion) has flowed out of emerging market funds since Oct 4, with US$18 billion of that taking flight since Nov 9.

“The magnitude of outflows has diminished significantly in recent weeks, but the direction has remained persistently negative,” said Scott Farnham, an IIF research analyst.
BlackRock, the world’s largest asset manager is expecting to reap solid gains from all emerging market asset classes, especially bonds, the firm’s chief fixed income strategist, Jeff Rosenberg said at the company’s recent global outlook summit.

Other global fund managers also see a rebound on the horizon.

Ricardo Adrogue, head of emerging markets debt at Baring Asset Management Ltd, said analysts, including ratings agencies, are confusing structural versus cyclical problems when evaluating the sector.

However, credit ratings agencies S&P Global, Moody’s Investors Service and Fitch Ratings have recently lowered positive credit outlooks and written even more negative outlooks for emerging markets. Moody’s even highlighted the risk of capital flight and potential weakness in the banking sector.

Diane Vazza, managing director of global fixed income research at S&P Global ratings agency, noted worries about geopolitical risk and energy companies not being able to adjust to a longer-term trend of lower prices for oil and gas. – Reuters