Emerging markets inflationary rises near their end, says DWS

Emerging markets inflation has run half to two thirds of its course and prices should stabilize this quarter, said DWS Investments’ head of portfolio management for emerging markets.

Inflation across all EMs averages about 5%, said Andreas Römer.

“Central banks have to go for an additional two to three rate hikes. The risks of high inflation are a constant high oil price, ongoing labour cost pressure and bad weather, for harvests.”

He added Beijing may further loosen its cap on renminbi appreciation to help tackle its price rises.

While the cost of living in many EMs has risen, so too their capital markets have heated up on the back of strong investor inflows.

Römer said capital controls installed recently by some governments to dampen this could “provide more stability by putting a cap on fast money investing in shorter dated yield only for the FX appreciation.

“If too much short term money comes in, it can all get very bumpy in markets.”

Monthly flows to EMs have turned negative only one month since July, and been below $4bn in only one other month. They peaked at $20.2bn in September.

EMs are fuelling 68% of global GDP growth – including 31% of it from China and only 15% from the US.

Amid such fervor, Brazil charges foreigners 6% upfront to invest in local currency bond markets and prohibits such investments at the short end of the curve, China has not even opened capital account for bonds, and keeps it very restrictive for equities, and investors are limited to $5bn on foreign bonds and $15bn in corporates in India.

Nevertheless, Römer predicted EM share market size would eclipse developed markets by 2030.

Among all EM capital markets, though, he said the offshore renminbi fixed income market – called CNH – based in Hong Kong, will exhibit “the highest growth opportunities in Asia of double digit growth, coupled with currency appreciation.

“EM corporate bonds are a niche that will grow. There is ratings convergence to developed markets, and increasing supply. We’re not talking about small companies, they are leaders in their sector like Vale, Gazprom and Cemex. There is also enhanced liquidity as recent focus has moved from sovereigns to corporates.”

Asoka Wöhrmann, DWS chief investment officer, said: “This is a clear decade for all EM asset classes, not just equities, and EMs will go from being a niche strategy, to being core.”

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David Walker
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