Emerging markets have had a good run. Things may get bumpier
Nomura Holdings Inc. analysts led by Rob Subbaraman in Singapore listed trade tensions as one of four potential triggers for a major market repricing of EM risk premia, sparking a painful EM snapback
Kuala Lumpur: Emerging markets have weathered this year’s market volatility just fine so far. But some investors are using this as an opportunity to get a lot more selective, with challenges looming from trade tensions to the winding down of central bank stimulus.
“Now we can rule out the ‘global synchronized growth’ theme, which dominated early this year,” said Jinha Kim, head of global fixed income in Seoul with Mirae Asset Global Investments Co., one of South Korea’s biggest money managers. The firm has reduced its position in emerging-market currencies and bonds to neutral, and shifted to underweight for Turkey and Mexico specifically, Kim said.
Kim cited trade tensions in the wake of protectionist moves by US President Donald Trump as a concern for emerging-market growth prospects. Nomura Holdings Inc. analysts led by Rob Subbaraman in Singapore listed trade tensions as one of four potential triggers for “a major market repricing of EM risk premia, sparking a painful EM snapback” in a recent research note. And here are the other three:
“It is notoriously difficult to pinpoint the timing of an EM snapback, let alone the trigger,” the Nomura analysts wrote, offering a best-guess of the third quarter of 2018 as being high risk. Chile, Hungary, Poland and Thailand are among the less vulnerable, while Turkey, Hong Kong, Mexico and Malaysia are among the more exposed, they wrote.
The Chinese economy has continued to hold up. Gross domestic product expanded 6.8% in the first quarter from a year earlier, its government said on Tuesday. Still, the tiff with the US showed no signs of abating, with US President Donald Trump accusing China of devaluing its currency.
Not everyone sees emerging markets as particularly vulnerable. Hideo Shimomura, chief fund manager of Mitsubishi UFJ Kokusai Asset Management in Tokyo, says that decoupling between the developed world’s credit cycle and that of developing nations could help. Rather than emerging nations with solid growth prospects such as in Southeast Asia and eastern Europe, investors may choose to exit developed-world credit markets, he said.
Countries with large current-account deficits—making them reliant on inflows of foreign funds—and those offering little by way of premium may face the biggest tests if global strains develop.
“We are less constructive on select Asian currencies where we are concerned about valuations—such as in Taiwan and Thailand—and where we see less of a rates cushion in terms of spreads to compensate for higher yields,” says Jens Nystedt, a senior portfolio manager in New York at Emso Asset Management, which oversees $6.2 billion. “We continue to see value in Brazilian, Mexican, South African and Colombian local-currency bonds, including often the FX exposure.” Bloomberg
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