EM-focused asset managers have seized the opportunity to bash the EM sceptics that mostly had the upper hand in the past years. A rebound in industrial productivity and a pick-up in investment in China, albeit at least partly induced by a government stimulus, prompted Matthews Asia’s investment strategist Andy Rothman to declare talk of a hard landing in China should now end.
Ashmore’s head of research, the eternal EM optimist Jan Dehn, joined him, saying: “Those who predicted China to have a hard landing can once again pack away their misleading rhetoric until the next time global risk aversion requires an episode of unfounded EM panic in order to generate some unnecessary trading.”
It’s the Fed, stupid
While the Chinese economy is a lead indicator for emerging market, and especially Asia’s health, a stabilisation in China will not be enough to sustain the nascent rally in emerging markets. Emerging market equities have shown a remarkable correlation with commodity prices over the past year. So if this week’s oil price slide is to continue, we might well soon see some ‘unnecessary trading’ again in emerging markets
But the most important factor is possibly the Fed’s monetary policy path, and the price of the dollar which is closely connected to them former. After all, both have shown to have a major impact on emerging market asset prices over the past couple of years.
“The Fed has as of recently started to take the situation in emerging markets into account in its interest rate decisions, but it remains to be seen whether the Fed correctly assesses this,” says Van Nieuwenhuijzen.
Since the financial crisis, emerging markets have earned a reputation of instability, so there is reason to wonder whether the asset class now finally has sustained momentum for a long-awaited sustained rally, he admits.
The last time Van Nieuwenhuijzen was overweight the asset class, over half of European fund buyers were planning to increase their allocation according to Expert Investor data. Emerging market equities then indeed saw a six-month streak of net inflows, and the market rallied by 27% (in euro terms) from mid-March to the beginning of September, before losing momentum again.
With the market up almost 20% from its trough in February, investors who stepped back in at the right moment could of course decide to take their profits soon.
“We have already adjusted our portfolios five or six times year,” says the Dutchman, suggesting his return to emerging markets could indeed be short-lived, as has become a habit for European investors over the past years.
