Jan Dehn, Head of Research at Ashmore, was largely positive on EM assets for the next five years, pointing to their continued outperformance of developed market assets on a risk-reward basis.
Dehn is particularly bullish on emerging market local bonds, which he called the “best performing fixed-income product in the world.”
“The money that left emerging markets in the last few years is going back and its making its way into the real economy, which will enhance growth in developing countries.”
Growing interest in EM is currently bring fuelled by improving fundamentals, lower average levels of leverage, and greater commitment to reforms.
The border adjustment tax, one of US President Donald Trump’s key electoral pledges, could weigh heavily on the asset class, however. If taken at Trump’s word, the tax would see a 20% tariff levied on goods produced outside the US, which would have a direct impact on many EM economies, especially those that have strong trading relationships with the US.
Nuances Are Present
Although the general outlook for emerging markets is positive, Ashmore is more bullish on some countries than others.
Egypt, Nigeria, and China all make the cut. Dehn believes that while these countries have struggled with high inflation, lack of access to foreign exchange, heightened leverage and dampened growth, respectively, they have nevertheless moved down the reform path – making way for a gradual uplift in economic performance.
Dehn seemed less concerned with China’s rapid accumulation of debt in the private and public sector, arguing that a high average domestic savings rate – leading to a well-capitalised banking sector – and improving capacity for debt repayment has mooted some concerns around the country’s markets. Earlier this year People's Bank of China Governor Zhou Xiaochuan told reporters that leverage in the non-financial corporate sector in particular was “excessively high”, with corporate debt soaring to more than 170% of GDP.
“China does not have a systematic debt problem” Dehn affirmed.
Turkey and South Africa were singled out as two emerging market economies with troubling outlooks on the horizon.
The Turkish economy managed to put in 5% growth at a time when most economists were anticipating about 3.4/3.5%, but the country’s fundamentals remain challenged by an unsustainable expansion of credit and excessively loose monetary policy.
“Turkey remains vulnerable to outflows in the capital account and the level of credit outstanding is too high. Political fundamentals are also deteriorating, so if a crisis happens Erdogan may hold on by extra-judiciary means,” he told Bonds & Loans.
“The country is recuperating some of the growth it lost last year due to the coup attempt, but it will not last.”
Ashmore is much more bullish on South Africa, despite a series of sovereign credit rating downgrades to “junk” earlier this year coupled with a simmering political crisis that has in recent weeks led to massive protests and calls for South African President Jacob Zuma’s resignation.
Spreads on local currency bonds have widened between 10bp and 30bp over the past five weeks according to data from Bloomberg, while the rand has settled back down to ZAR12.776 per US dollar from multi-month lows of ZAR13.952 in late May.
“South Africa’s Central Bank still has credibility and the country has strong institutions, they are undergoing a political crisis that will eventually be resolved,” Dehn added.