Emerging markets : “The oasis in a yield desert” – Amundi

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Amundi has recently published a outlook on emerging markets debt and equities. According to the firm, in the current low yield returns environment in fixed income on the developed markets, emerging markets provide “an oasis in a yield desert”, where “both debt and equities offer attractive opportunities.”

“Amundi’s view is that hard currency denominated EM debt provides the more attractive risk return profile but that there are also opportunities in local currency debt,” the firm said.

Abbas Ameli-Renani, global emerging markets strategist at Amundi London, explained: “Emerging economies are in much better fundamental shape today than they were during the “taper tantrum” of 2013, including the “fragile five” of India, Indonesia, South Africa, Brazil and Turkey.

“Despite the many external market and domestic political challenges, blow-ups in EM have been avoided so far.”

He added:  “Current account deficits have been tightened and fiscal balances have improved. Meanwhile inflation has fallen dramatically and the tighter policy rates in many EM countries compared to the taper tantrum episode, provides for a much healthier real interest rate to cushion against external shocks.”

Emerging markets have however encountered some headwinds such as the fall in oil prices which “has added to downside growth pressures on many emerging economies, particularly Russia and those in Latin America,” Amundi pointed out.

The firm assesses that China’s slowdown is already being felt. “Part of the fall in commodity prices is a reflection of that,” said Amundi which foresees China’s landing as “a soft one.”

“As far as Russia is concerned, although it has felt the effect of lower oil prices, its currency depreciation has mitigated the revenue shortfall from oil prices, leaving fiscal metrics in much better shape than widely anticipated.

“Meanwhile Brazil is now recovering fiscal credibility under its new finance minister and the worst seems to have been avoided on the Petrobras scandal.

“In India last year’s election uncertainty has passed and the country is now a firm market favourite on its reform drive,” the firm reported in its emerging markets outlook.

EM equities

On the EM equities side, Amundi argues that investment is “grounded in encouraging fundamentals, though more patience may be required to reap the full benefits.”

According to Mickael Tricot, deputy head of Emerging Market Equities, “there was no great crisis in emerging markets. This is a major positive.”

“We are half way through a healing process,” he said.

“We are still looking for improved earnings per share growth which has been lacking over the last three or four years. Some markets are still in need of structural reform in order to get their economies growing again.

“In cases such as China and Brazil, we have seen a significant involvement of the public sector in their economies but we would now like to see the private sector driving in greater innovation,” Tricot spotted.

Tricot highlighted that emerging markets equities have outperformed developed country equities since 1960 and added that there is no reason why higher rates of economic growth in emerging markets should not be maintained.

“Currency risk is still a potential challenge and is one reason why a longer perspective is advisable for EM equity investors.

“Yet we note that emerging currencies have already significantly adjusted since the 2013 “Taper tantrum” and we believe that the bulk of this depreciation is now behind us while improving current account balances points to currency resiliency in several instances,” Amundi said.

The firm noticed that there has been “a mushrooming” since 2005 in country funds, frontier funds, regional funds and in allocation policies within global EM funds to particular sectors and selected stocks.

Tricot suggested patience to EM equity investors.

“There is a low probability of significant negative event risk and once there is profit growth, we should see attractive returns going forward,” concluded Amundi.

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