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Emerging markets: behind noise and myths lie real opportunities

investment viewpoints

Emerging markets: behind noise and myths lie real opportunities

Didier Rabattu - Head of Equities

Didier Rabattu

Head of Equities
Pascal Menges - Client Portfolio Manager (Equities)

Pascal Menges

Client Portfolio Manager (Equities)

The crisis in Turkey has thrown a spotlight on emerging market (EM) economies, raising the question of whether others are also at risk. We believe the majority of these economies are fundamentally strong and problematic countries represent isolated, idiosyncratic cases.

Given the extent of negative newsflow over the summer months, investors would be forgiven for assuming a double-digit drop had occurred in emerging equity markets. But a look at the data reveals a picture of a justified market correction that appears to us as “normal” in both nature and magnitude.

We believe that the majority of the year-to-date fall is explained by a limited number of countries and sectors, and that the “culprit” countries only represent a very small part of the overall index. Turkey especially represents an idiosyncratic case with deep fundamental flaws that are not shared by its peers. 

The strength of the dollar has been flagged as another potential problem for emerging market economies. A strong dollar is widely perceived as bad for those with large quantities of dollar-denominated debt and the overall impression is the future may be tough for these economies.

There is also the growing threat of a fully-fledged trade war between the US and China. Emerging markets may not be as impacted as some estimates would suggest, since most have strengthened their domestic economies. That said, we are watching the situation between China and the US very carefully. If things were to deteriorate into an open trade war, we would expect that to have some negative impact across markets.

While emerging markets are down year-to-date, this represents a relatively minor drop overall and should be viewed as more of a typical correction in the current bull market, in our view. The fall is also limited to a small number of sectors which are experiencing isolated headwinds related to President Trump’s penchant for tariffs. Taken in the proper context, we believe these actually present a number of compelling valuation anomalies.

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