"\u2018Decade of Emerging Markets\u2019 may be about to regain traction"

" \u2018Decade of Emerging Markets\u2019 may be about to regain traction \r\n\r\nEmerging-market bulls are still upbeat on the asset class, even after China\u2019s highly-touted reopening rally fizzled and proved Wall Street\u2019s early 2023 optimism to be misplaced.\r\n\r\nDeveloping-nation assets stand to finally take off in the second half, they say, as long as global interest rates peak, Chinese authorities prop up growth and structural reforms in India bolster sentiment. A revival may still make this the decade of emerging markets that Morgan Stanley Investment Management flagged earlier this year.\r\n\r\n\u201cIndia, Brazil, China, they don\u2019t have an inflation problem any longer, so they may cut rates faster than the Federal Reserve,\u201d said Xavier Baraton, global chief investment officer at HSBC Asset Management in Paris, on Bloomberg Television. \u201cIf you\u2019re looking for true diversification at this time, you\u2019ve got to look into true EM. You\u2019ve got to look into Asia. You\u2019ve got to look into India, which is under-appreciated.\u201d\r\n\r\nWhile the first half of 2023 hasn\u2019t been a disaster for EM investors, it has fallen far short of buoyant forecasts.\r\n\r\nMSCI Inc.\u2019s emerging-market stock index has risen 4.8% so far this year, well behind the 11% gain in a gauge of developed-nation peers. An index of EM currencies, meantime, edged up 1.7%. And emerging local-currency bonds have only narrowly outperformed a global debt gauge.\r\n\r\n What Bloomberg\u2019s Strategists Say \r\n\r\nIt\u2019s nice to see that there\u2019s more to investment life than simply buying ludicrously-valued tech stocks, and that one can derive comparable if not superior returns from alternative strategies with a less odious value proposition. If global inflation and monetary tightening has had one positive impact from an investment perspective, it\u2019s been the revival of the good old-fashioned EMFX carry trade \u2014 Cameron Crise, macro strategist\r\n\r\nAmong the factors crimping gains, China\u2019s exit from Covid-Zero restrictions has failed to translate into broad economic strength, instead boosting spending on services such as travel and eating out, leading to weak credit growth, contracting exports and a slowdown in housing sales. The impact has spread to other markets that rely on Chinese demand such as South Africa and Thailand.\r\n\r\nThat\u2019s cast doubt on the bullish view set out by Morgan Stanley Investment Management in January: that emerging-market stocks are set to be this decade\u2019s winners amid attractive valuations and a superior growth outlook \u2014 especially in countries such as India.\r\n\r\n Equity Opportunity \r\n\r\nOn the positive side, the underwhelming numbers so far mean some metrics are now identifying pockets of value across of the emerging-market landscape.\r\n\r\nBenchmark share indexes are expected to rise in most emerging markets by year-end, with some of the biggest gains expected in Hong Kong and mainland China, according to aggregate analyst price targets compiled by Bloomberg.\r\n\r\n\u201cThe pessimism, particularly in China and Hong Kong, has been extreme and is not accurately reflecting the economic fundamentals,\u201d said Greg Lesko, a managing director at Deltec Asset Management LLC in New York. He favors consumer names that are likely to be supported by targeted Chinese stimulus.\r\n\r\n\u201cAlibaba, JD.com are silly cheap and have tons of cash, but got hit on US-China tensions,\u201d he said. \u201cIndonesian banks are money-making machines.\u201d\r\n\r\n Value in Currencies \r\n\r\nMany emerging-market currencies may also be set to strengthen as the Fed nears the end of a tightening cycle that has already been underway for more than a year.\r\n\r\n\u201cAssuming that we are one or two hikes away from the peak, then that headwind to EM currency performance should dissipate,\u201d said Edwin Gutierrez, head of emerging-market sovereign debt at abrdn Plc in London. \u201cIt also psychologically will pave the way for more EM central banks to consider rate cuts in the coming months.\u201d\r\n\r\nThe lack of a clear driver has led to scattered performance among emerging currencies this year, while uncertainty over Fed tightening has boosted volatility. The Colombian and Mexican pesos have both surged more than 10%, while the Turkish Lira has tumbled about 20%.\r\n\r\nThe end of global rate hikes will help reduce volatility and support the carry trade, and that will benefit higher-yielding EM currencies and bonds, said Alvin T. Tan, head of emerging-market currency strategy at RBC Capital Markets in Singapore.\r\n\r\n\u201cA more concerted return of the carry trade would benefit the higher carry Latam and EMEA currencies even more, excepting the ones under the spell of unorthodox policies, such as the Turkish lira,\u201d he said.\r\n\r\n Developing-Nation Debt \r\n\r\nThere are advocates for developing-nation bonds, too, as peaking central-bank interest rates boost the attractiveness of higher-yielding assets.\r\n\r\n\u201cWe are anticipating the start of the easing cycle out a number of emerging markets in the second half of this year, starting with the Latin American economies, and also then some of the Central and Eastern Europe economies,\u201d said Phoenix Kalen, head of emerging-market research at Societe General SA in London.\r\n\r\n\u201cThere is space for there to be some thinking about pre-positioning for those rate cuts, and space for the rates to come back in \u2014 especially given how high real policy rates are at this point in time, especially out of Latam,\u201d she said.\r\n\r\nYield-hungry investors have already been piling into Indonesian bonds after the central bank all but ended its tightening cycle earlier this year, while its domestic coffers remain healthy from the rally in commodities. Rupiah-denominated debt has returned about 11% in dollar terms this year.\r\n\r\nIndian bonds are also looking attractive due to good growth, a potential rate cut later this year as inflation moderates, and a trade balance that has \u201cnever been better,\u201d said Eric Lo, Asia fixed income portfolio manager at Manulife Investment Management in Hong Kong."

"\u2018Decade of Emerging Markets\u2019 may be about to regain traction"

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