Bulls will retain the upper hand in emerging markets this year, though some assets may face a bumpier ride than in 2017.
Bonds and equities in developing countries will continue to streak ahead, outpacing their developed-nation peers in 2018, according to a Bloomberg survey of 20 investors, traders and strategists. Currencies, however, may struggle to stay in front. The survey was conducted between 5 and 14 December 2017. And while the Federal Reserve’s actions will remain key in determining the fate of what has been the strongest equity rally for emerging-market stocks since 2009, geopolitical risks will be less of a focus as investors zero in on Donald Trump and the outlook for the world’s second-largest economy: China.
“The environment for emerging markets was great in 2017 with the Goldilocks factors of economic growth and low inflation in industrialized countries,” said Hideo Shimomura, chief fund manager in Tokyo at Mitsubishi UFJ Kokusai Asset Management Co., which oversees the equivalent of $114 billion. “The emerging market rally we saw this year will probably extend into 2018, but after a period of strong growth and low inflation, some adjustment will be inevitable.” Investor darlings in 2017, thanks to high yields and buoyant growth prospects, emerging markets have weathered Trump’s protectionist rhetoric and a swathe of geopolitical brush fires—from the Middle East to the Korean peninsula. But after the rally in stocks and currencies last year, investors may be more selective in 2018 as headwinds like Fed tightening weaken the appeal of emerging markets.
Consistent with a survey in October 2017, market watchers continue to see the Fed and President Trump’s policy moves to be key for developing-country assets. What happens with China—where authorities are waging a battle against debt and President Xi is cementing his power—has edged up in the rankings.
Going forward, Mexico’s peso and bond market as well as Brazilian equities are among the most-favoured emerging-market assets, while Turkey’s assets ranked low given the country’s political uncertainty. The lira, one of the worst performers in emerging markets last year, will remain in the doldrums in 2018. The currency plunged to a record low as Turkey’s President Recep Tayyip Erdogan criticized the central bank in November 2017, saying it was on the “wrong path” in tackling the soaring inflation.
But in general, the stars will continue to align from a macroeconomic perspective, with global growth expected to be steady and inflation subdued, said Colin Harte, a London-based fund manager and strategist for multi-asset solutions at BNP Paribas Asset Management, which oversaw the equivalent of $673 billion at the end of September 2017.
“This Goldilocks environment will be one where central banks will continue to pursue accommodative monetary policy and follow their existing reaction functions,” he said.