According to fund manager NN Investment Partners (NN IP), emerging markets will continue to perform strongly against developed markets despite policy tightening.
NN IP senior emerging markets strategist, Maarten-Jan Bakkum, commented: “There is little doubt that tighter financial conditions pose a risk to EM growth. But for now, we feel it is too early to call the end of the EM credit recovery. The relative strength of China, India, Korea and Russia in this environment is encouraging. These markets should help to keep the EM-DM outperformance trend intact.”
In emerging market debt, profit-taking in EM currencies against the US dollar could be creating investment opportunities, according to Jan Dehn, head of research at Ashmore Group, the EM debt specialist manager. Dehn said that the media normally over-hypes market pullbacks. He added: “Our view is that the recent pull back in EM has restored significant value and material upside potential to an EM fixed income asset class, which already looks set to significantly outperform developed market assets in the years ahead. We see nothing in the recent unwind of EM positions, which in any way changes the benign outlook for EM.”
However, Dehn said that Argentina and Turkey now look vulnerable due to self-inflicted problems. In Turkey, Dehn said President Erdogan takes the view that high interest rates cause high inflation. “Due to this warped understanding of basic economies, Erdogan repeatedly applies pressure on the central bank to keep rates low, especially when inflation rises. The result that inflation rises even more, that domestic credit growth is too strong and that the current account position is in a precarious state,” Dehn commented.
On Argentina, he said that raising the inflation target was a mistake as inflation was still too high. “Argentina’s government has yet to get its head around the fact that demand needs to be cut dramatically if inflation expectations are to be decisively broken and the current account deficit materially reduced,” he commented.