Emerging Markets – Buy or Sell?

2014 is likely to be a year of transition for both the developed and the emerging world. In the developed economies, there are somewhat tentative signs that economic recovery is gathering pace with monetary policy in the United States becoming less available. This is the so-called tapering process. In the emerging world, by contrast, economic growth has been slowing, in particular the domestic part of some economies. The tapering process in the US has weakened some emerging market currencies and has challenged policy makers to tighten monetary policy in order to combat both inflation and capital outflows. Against this backdrop, developed world equity markets have seen significant inflows and have rallied strongly. Emerging equity markets, however, have been weaker with outflows and currency depreciation.

Emerging Economies generally had a difficult 2013 with slowing world trade and abrupt corrections to their equity, bond and currency markets following the US decision to taper. The economies most seriously affected were those that had allowed money and credit growth to expand the most in the preceding three years and consequently had built up the largest current account deficits – economies such as Brazil, India, Indonesia, Turkey and South Africa, also known as ‘the fragile five’. Their recent lack of discipline means they now need a period of monetary and fiscal tightness before their economies can regain momentum in late 2014 or 2015. The outlook for 2014 is better in those emerging economies that maintained the discipline, but even amongst these they are likely struggle as long as world trade remains weak.

Latin America – economic growth has been slowing and continues to slow. However, in the major markets here, economic growth remains positive. Weaker currencies are likely to provide a boost to competiveness in the second half of 2014 and into next year. If this is also allied with an improving economic backdrop in the developed world, then this will help economies rebound in Latin America.

Asia – has an enviable and consistent track record of economic growth, supported by subdued inflation, current account surpluses and appropriate fiscal management. China is rebalancing, and that is to some extent a painful process, so growth may well slow here. However, both in respect of both the global economy and emerging markets, rebalancing in China towards a more domestic and consumption-led growth will be beneficial.

Emerging Europe – most countries are still showing reasonable economic growth. Turkey is likely to slow in 2014 in the face of higher interest rates. However, countries such as Poland, Hungary and the Czech Republic will benefit from their links to the improving economies of Western Europe.

Summary
Stock valuations are cheap, emerging markets are oversold and somewhat out of favour and flows have tended to leave the asset class. However, any improvement in earnings revisions could be an important trigger for better performance from emerging markets. In this year of transition, it is important to focus on companies that can deliver decent earnings growth and returns.

If you would like to discuss how this may impact on your financial planning decisions, please contact us on 01626 833225 to arrange an initial meeting.