Political threats to EMD through 2014 highlighted by JP Morgan AM CIO Pierre-Yves Bareau
Pierre-Yves Bareau, chief investment officer, Emerging Markets Debt at JP Morgan Asset Management, sees elections throughout 2014 posing a threat to EM stability.
Political activity is an important theme in 2014 in emerging markets. A heavy election calendar in several key EM countries, including all of the fragile five, could also drive increased volatility. However, the underperformance in 2013 has created value in many markets, especially those where tapering fears led to overblown solvency concerns. Outflows have also been a headwind for the asset class, but lighter investor positioning has provided more supportive technicals, especially amid negligible or negative net issuance.
As we do not see a catalyst for broad EM outperformance in 2014, country differentiation will be a crucial factor. Capital outflows will continue to place pressure on deficit countries. We are wary of external vulnerabilities in Turkey and South Africa, although we believe there will be tactical opportunities in both countries. We are also concerned about political risks and a potential sovereign downgrade in Brazil. However, in Indonesia, we believe valuations have become very attractive and the government has shown some willingness to address structural reforms.
|Country||Dates||Type of election|
|Costa Rica||02-Feb||President and Legislative|
|Indonesia||09-Apr||House of Representatives|
|South Africa||April-July||General election|
|Brazil||05-Oct||President and National Congress|
|Uruguay||26-Oct||President and Parliament|
|Namibia||November||President and National Assembly|
|Argentina||01-Oct||President and Legislative|
We continue to favour countries with lower sensitivity to rising Treasury rates, such as Iceland and Argentina. Countries linked to DM growth through manufacturing exports will continue to outperform, while commodity-oriented countries remain vulnerable, especially as global oil supplies grow. Mexico will also continue to be a rising star as the implementation of its reform agenda progresses.
Although valuations look attractive across emerging market bond sectors, we believe some of the more fundamental risks are yet to be fully priced in. One of the key aspects for the markets in 2013 was the lack of clarity around the timing and size of US tapering, which should be less of an issue in 2014. However, more volatility could yet materialise due to various idiosyncratic factors, such as political events.
That said, EM growth appears to be increasingly re-coupled with DM growth, and as US and European growth picks up, the benefits should feed through to EM economies as well. The key will be to focus on turnaround stories and to take advantage of fundamental improvements through cyclical adjustments. Overall, we retain a cautious bias and believe that a tactical allocation to risk assets will be more appropriate for 2014.