Our belief is that there are three key events or trends that will affect emerging markets during the second half of 2015.
Firstly, the likelihood of a “U Shaped” growth recovery. In a disinflationary world, growth recovery would be a gradual “U shaped” rather than a historical “V shaped” recovery.
Secondly, demand scarcity with capital abundance, we believe that world today faces a demand problem while capital remains in plenty thanks to quantitative easing (QE) by big central banks. In such a scenario, relatively unleveraged economies with favourable demographics and stable political structures like India, Philippines and Indonesia are likely to attract significant investment interest from businesses, creating a virtuous loop.
Thirdly, will the US Fed raise interest rates? As we head into the second half of 2015, expectations of the US Fed raising interest rates will become more of a market focus. Rate hike cycles predicated on strong growth and normalization of monetary policy offer an opportunity in emerging markets. Markets that can take advantage of an increase in trade from strong global growth should benefit in our view; especially those trading at below average valuations.
In terms of regional plays, we remain constructive on Asian equities in 2015, although post a strong run up, pullbacks are possible as growth response to monetary easing would be fairly uneven across economies. The benign commodity cycle is a key positive for the Asian region overall, yet the widening premium in China A-shares over H-shares and extended valuations suggest that the Chinese market may have become overheated. Within this backdrop, we adhere to the view of getting “China right” as a central element within our Asia portfolio, moderating polarizing utopian and doomsday scenarios by investing in high quality companies at reasonable valuations through bottom-up stock picking.