Complete reversal in emerging equity markets in 2016: the highly geared/cyclical/risky stocks that collapsed in 2015 skyrocketed in 2016. Where to go?
In 2015, emerging markets have had stormy times. An unexpected devaluation of the Yuan, the collapse of numerous emerging currencies and the implosion of China’s local market were just some of the headwinds. In 2016, emerging markets were back in positive territory benefiting from a more clement economic climate. A rebound in commodity prices, a weaker dollar, a more dovish stance from the Fed, ongoing monetary policy accommodation and stabilization of key indicators in China combined to give a number of emerging markets a new lease of life. All of these elements combined led to a repricing of risky assets and to a reversal in the markets.
Improvement of risk/reward profile for emerging markets
More importantly, from an investors’ point of view, there was an improvement in the risk/reward profile for emerging markets: a better compensation for a lesser degree of risk. Indeed, risk, defined as the sum of current account deficit and short-term external debt levels has diminished, while on the other hand, the risk premium (measured by the difference between emerging and developed markets real rates) stand today at historical highs.
While developed markets’ monetary authorities continue untiringly their unconventional policies, emerging countries’ central banks are, for their part, conducting orthodox policies which are bearing fruits. Inflation eases while central banks maintain high rates, thus offering high real yields, especially in Brazil, Russia or Indonesia.
Promising opportunities for investments
“The” right time to invest in this universe will always be difficult to gauge and might depend more on luck than a real know how. However, with today’s improved risk/reward outlook, it might not be the worst time to come back into emerging equities for those who still remain hesitant.
It is important to keep in mind that in this reassuring context a crucial element always seems missing: growth. As a matter of fact, many of emerging markets’ structural problems remains intact: weak global trade, not comforting developed market growth, high leverage and excess capacity concerns.
For this reason, a focus on long-term secular growth and the fundamentals of the countries, sectors and companies is important.
