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Abu Dhabi, UAESunday 16 December 2018

Emerging markets' bull run may be tested in 2018

Some asset classes may face a bumpier ride than in 2017

The Emerging Markets bonds and equities in developing countries will continue to streak ahead, outpacing their developed-nation peers into 2018. Romeo Ranoco / Reuters.
The Emerging Markets bonds and equities in developing countries will continue to streak ahead, outpacing their developed-nation peers into 2018. Romeo Ranoco / Reuters.

Bulls will retain the upper hand in emerging markets this year, though some assets may face a bumpier ride than in 2017.

Bonds and equities in developing countries will continue to streak ahead, outpacing their developed-nation peers into 2018, according to a Bloomberg survey of 20 investors, traders and strategists. Currencies, however, may struggle to stay in front. The survey was conducted December 5-14.

And while the Federal Reserve’s actions will remain key in determining the fate of what has been the strongest equity rally for emerging-market stocks since 2009, geopolitical risks will be less of a focus as investors zero in on Donald Trump and the outlook for the world’s second-largest economy: China.

“The environment for emerging markets was great in 2017 with the Goldilocks factors of economic growth and low inflation in industrialized countries,” said Hideo Shimomura, chief fund manager in Tokyo at Mitsubishi UFJ Kokusai Asset Management, which oversees the equivalent of US$114 billion. “The EM rally we saw this year will probably extend into 2018, but after a period of strong growth and low inflation, some adjustment will be inevitable.”

Investor darlings in 2017, thanks to their high yields and buoyant growth prospects, emerging markets have weathered Trump’s protectionist rhetoric and a swathe of geopolitical brush fires -- from the Middle East to the Korean peninsula.

But after the rally in stocks and currencies last year, investors may become more selective in 2018 as headwinds like Fed tightening weaken the appeal of emerging markets.

Consistent with a survey in October, market watchers continue to see the Fed and President Trump’s policy moves to be key for developing-country assets.

What happens with China -- where authorities are waging a battle against debt and President Xi Jinping is cementing his power -- has edged up in the rankings.

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Going forward, Mexico’s peso and bond market as well as Brazilian equities are among the most-favored emerging-market assets, while Turkey’s assets ranked low given the country’s political uncertainty.

The lira, one of the worst performers in emerging markets last year, will remain in the doldrums in 2018. The currency plunged to a record low as President Recep Tayyip Erdogan criticised the central bank in November, saying it was on the “wrong path” in tackling soaring inflation.

But in general, the stars will continue to align from a macroeconomic perspective, with global growth expected to be steady and inflation subdued, said Colin Harte, a London-based fund manager and strategist for multi-asset solutions at BNP Paribas Asset Management, which oversaw the equivalent of $673bn at the end of September.

“This Goldilocks environment will be one where central banks will continue to pursue accommodative monetary policy and follow their existing reaction functions,” he said.

Respondents in the survey were Bank of Ayudhya, BlackRock, BNP Paribas Asset Management, Credit Agricole, Dai-ichi Life Research Institute, Daiwa SB Investments, Deutsche Bank Wealth Management, DuPont Capital Management, FPG Securities, Invesco, Kasikornbank, Krung Thai Bank, Mitsubishi UFJ Kokusai Asset Management, Mizuho Bank, NBC Financial Markets Asia, Neuberger Berman, Nomura Asset Management, Old Mutual Global Investors, SBI Securities and Sumitomo Mitsui Trust Asset Management.