Reforms in emerging markets play an important role in the country-picking operated by emerging market portfolio managers.
Newton IM’s global EM portfolio manager Sophie Whitbread said EM countries that have been able to carry out reform are seen favourably.
According to her, Mexico has been at the forefront of them.
“The country’s tax system, electricity utilities and telecoms sector have all been liberalised since the election and the results have been overwhelmingly positive. The most significant area of reform, however, is in the energy sector.
“One question for investors is whether the current reforms are sufficiently ‘sticky’ to outlast the next general election, while all three of the country’s main political parties remain committed to improving GDP, the picture on reform remains nuanced. In my view, the most likely outcome is for a less powerful majority for whichever party wins power,” she explains.
Another EM state, Colombia, is under reforms’ spotlight. The country is expected to pass a structural fiscal reform later this year. A package that Rodica Glavan, emerging market debt portfolio manager at Insight Investment, calls “one potential bright light.”
“This could significantly improve Colombia’s fiscal sustainability in the medium term and allow it to keep its investment grade rating,” she said.
“The administration of President Juan Manuel Santos has taken the right steps to mitigate the impact of the decline in the oil price on the economy, by letting the currency act as the main shock absorber while also cutting expenditure to offset lower revenues from commodity-based activities.
“Even so, the government will need to emulate its regional peers in pushing for wider liberalisation if it wants to build on recent progress. Economic imbalances have not been fully addressed and more needs to be done, particularly in terms of fiscal reform,” Glavan argued.
She also stressed that inflation appears to be peaking, and the central bank may be nearing the end of the hiking cycle.
Glavan said she would argue local rates look attractive.