Despite having faced significant headwinds over the last six months, the outlook for emerging markets is positive, and particularly for investors in emerging market debt (EMD), says Gorky Urquieta, co-head of Neuberger Berman’s emerging markets debt team.
“In the near term, our outlook for EMD is cautious – we believe the asset class has hit an inflection point of market adjustments to the potential ‘beginning of the end’ of ultra-easy global monetary conditions.
“However, despite recent ‘noise’ to the contrary, emerging market economies are generally expected to improve and remain stronger than developing market counterparts. The financing needs of sovereign and corporate issuers are relatively moderate, potentially limiting supply and supporting credit fundamentals and spreads.
“In general, we believe that, recently, investors have made too much of slowing growth in emerging markets and we expect some economic resurgence, supported by global recovery which should partially offset China’s slowdown, even as EM policymakers gradually scale back monetary support.
“We believe that slow, steady economic improvement could provide a modestly positive backdrop for EMD, particularly in comparison to other sectors within fixed income.”
Mr Urquieta said that EMD should also continue to benefit from the long-term trend of inflows, as investors within fixed income add exposure to emerging markets, which are structurally underrepresented in their portfolios.
“With the global fixed income universe continuing to see near-historic low yields, the appeal of taking an opportunistic, global approach to bond investing in order to broaden potential sources of yield and total return is being reinforced.
“Within this context, we believe the structural case for EMD remains strong, as investors increasingly recognise the economic significance, improved credit quality, and depth of emerging market economies, and accordingly make up for prevailing low allocations to EMD,” he said.
Looking at individual markets within the sector, Mr Urquieta said that China is obviously a key factor in EM economic health and opportunities for investors.
“Recent softening has contributed to weaker commodity prices, which has broadly impacted producing countries. Even with current challenges, however, we believe that China could grow by 7.6 per cent this year, with the new government settling in, social financing growth filtering into investments, and increased real estate investment on rising property sales.
“We also believe that Japan’s monetary shift is a positive for EM Asia. Japan’s recently introduced program to reflate the economy will likely impact the region in two ways – first, the country in now more competitive with EM Asian markets, particularly Korea; and second, a rise in Japan’s domestic demand could increase from other Asian countries such as Indonesia and Malaysia.
“Overall, growth in EM Asia should pick up this year, potentially to 6.5 per cent this financial year and to 6.7 per cent in 2014. The more advanced Asian economies of Korea, Taiwan, Hong Kong and Singapore should move to catch up with the ASEAN-4 – Indonesia, Malaysia, Philippines and Thailand – thanks to a continued recovery in exports to the US.
“We have also increased our GDP growth forecasts in India and, looking past the current tightening there, expect growth of 7.2 per cent in 2014.
“Even in European emerging markets, we are seeing positive signs. We believe that the expansion should remain on track at 2.2 per cent in 2013 and rise to 3.1 per cent next year. We expect the unwinding of last year’s stresses in the Eurozone, as well as the lowering of interest rates by several central banks, to support growth.
“As for Latin America, we believe the slight uptick in expansion there should be driven by the recovery in Brazil, while Mexico is likely to slow. However, fiscal challenges are increasing rapidly in Venezuela and Argentina, where authorities elevated public spending ahead of elections in April and October this year, respectively.
“Emerging markets in the Middle East and Africa remain a concern. Growth in the Middle East is likely to soften due to flattening crude oil production by the Gulf Cooperation Council member states.
“Similarly, in Africa, growth should remain flat at 4.1 per cent this financial year as post-Arab spring challenges and weak commodity prices hold back many economies. However, in the longer term growth should then accelerate to 4.9 per cent.
“Overall, EMD’s recent underperformance relative to US spread products and European peripheral sovereigns has improved the relative value of EMD, and we anticipate over the course of the year, inflows will be positive,” he said.
Neuberger Berman was established in 1939 and is a US-based asset management company with approximately US$214 billion in assets under management throughout the world (as at 30 September 2013) and over 400 asset management professionals. It is one of the world’s largest independent, employee-controlled financial services organisations.
The company offers a number of funds in a range of asset classes including global and emerging market equities, bonds, and alternatives such as hedge funds and private equity.
Neuberger Berman Australia gained a licence to operate in Australia in April 2011.
For further information please contact:
Lucas Rooney – Phone: 03 9649 0912
Paul O’Halloran – Phone: 03 9649 0906
27 August 2013