latames
Are emerging markets on the rebound?

Are emerging markets on the rebound?

29-11-2018 | Visión

We expect emerging market equities to outperform developed market equities in 2019. There are three key reasons why we feel this will happen.

  • Victoria  Mio
    Victoria
    Mio
    CIO Chinese Equities
  • Jeroen Blokland
    Jeroen
    Blokland
    Portfolio Manager
Source: IMF & Robeco

First, the gap between GDP growth in emerging and developed countries is likely to widen next year. It will be the first time that has occurred since 2016. In the latest IMF growth forecasts, shown above, growth in emerging countries is expected to accelerate somewhat while growth in developed markets will ease over the next few years. By 2020, this gap is expected to widen by almost a whole percentage point. Historically, the gap between growth rates in emerging and developed markets is one of the strongest drivers of the emerging market equities relative to their developed market counterparts.

Second, while we expect the Federal Reserve to keep hiking rates, we also believe it will do so very gradually. In addition, investors could start to anticipate an end to the tightening cycle later next year. Assuming some normalization of monetary policy outside of the US, we expect the US dollar to weaken. A stronger US dollar often means tighter financial conditions. For example, a significant portion of emerging sovereign and company debt is denominated in dollars. Therefore, a weaker dollar implies looser financial conditions for emerging countries.

Third, emerging markets are cheap. The prolonged underperformance of emerging market equities has made valuations more attractive compared to other regions, especially the US. The trailing P/E ratio of the MSCI Emerging Markets Index has fallen from 16 earlier this year to its current level of 12. This is cheap in both absolute and relative terms. While valuation is seldom a trigger for a change in market leadership, we think it could be an important catalyst for emerging market relevance when the relative outlook starts to improve.

This article is part of our investment outlook 2019: ‘Turbulence ahead’.
This article is part of our investment outlook 2019: ‘Turbulence ahead’.
Read more

Risks

Obviously, what appears to be a bright future for emerging markets also comes with a number of significant risks. Some emerging economies like Argentina and Turkey look weak at best. These economies are particularly vulnerable to any adverse shock to global economic conditions or investor sentiment. At the same time, most of these economies are relatively small and unlikely to cause a widespread crisis across emerging markets.

If the US economy overheats, that would be bad news, as well. In that scenario, the Fed would tighten monetary policy more aggressively, causing liquidity to fall and the US dollar to rise. Finally, emerging markets remain relatively vulnerable to any escalation in the trade war between China and the US. While equity prices now reflect a long-term trade dispute with some resulting loss of economic momentum, bigger tensions could hurt emerging markets going forward.

Source: MSCI, Robeco

In addition to emerging market equities, we also think there will be opportunities in Chinese A-shares. A key driver for this is that index providers are increasing the weight of Chinese A-shares. As a result, foreign investors will likely increase their exposures to A-shares. After this year’s sell-off, fundamentals, especially valuations, look increasingly attractive, especially as we expect fundamentals to improve throughout the year.

Increasing the weight of A-shares

The announcement by FTSE to add A-shares to the FTSE Global Equity Index Series with a 25% inclusion factor and MSCI’s proposal to increase the inclusion factor from 5% to 20%, reflect China’s ongoing progress on capital market reforms. After the 25% inclusion, A-shares will account for 5.6% of the FTSE Emerging Index. In MSCI’s case, the pro forma index weight of China A-shares in the MSCI EM Index would be 2.8% in August 2019. The addition of China A mid-cap securities with an inclusion factor of 20% in May 2020 would increase the pro forma weight further to 3.4%. At full inclusion, A-shares would take up nearly 15% of the emerging market index and all China stocks would account for over 40% of EM.

The China A-share market has already witnessed robust inflows this year. As a result, foreign ownership of China onshore equities had risen to 3.2% by Q2 of 2018. This is, however, still low compared to other major markets: Taiwan (26%), Korea (34%) and Japan (30%). Assuming full inclusion of A-shares in the MSCI and FTSE by 2025, this could generate an estimated USD 70 bln to USD 100 bln in annual inflows into the A-share market and bring the foreign ownership up to 8%.

With China seeing more participation from foreign investors and a rising awareness of ESG, the corporate governance will gradually improve for Chinese companies. The focus of investors will also gradually shift towards more long-term fundamental drivers even though it could take time given the large proportion of retail investor participation. Despite the expected increase in foreign investment, the valuation of the A-share market is now at a level that is close to the historical minimum, with the P/E ratio trading at 9.8, compared to its historical average of 15.1. The price-to-book ratio has fallen to 1.5, below the historical average of 2.7. Valuation levels have become significantly more attractive this year.

Improving fundamentals

As mentioned, China’s economy will face some challenges from the prolonged trade friction between China and the US and its already elevated debt levels, leaving it little room to stimulate the economy with credit growth. This is part of the reason why sentiment surrounding A-shares remains low, even though at the macro level, China is now shifting towards a looser monetary policy and more expansionary fiscal policy. We believe, however, that sentiment has become a bit too bearish and that fundamentals, such as profitability, will slowly improve, helped by the positive policies and reform measures introduced by the government.

Outlook 2019: Turbulence ahead
Download the full 2019 Outlook
Los temas relacionados con este artículo son:
Logo

Información importante

Los Fondos Robeco Capital Growth no han sido inscritos conforme a la Ley de sociedades de inversión de Estados Unidos (United States Investment Company Act) de 1940, en su versión en vigor, ni conforme a la Ley de valores de Estados Unidos (United States Securities Act) de 1933, en su versión en vigor. Ninguna de las acciones puede ser ofrecida o vendida, directa o indirectamente, en los Estados Unidos ni a ninguna Persona estadounidense en el sentido de la Regulation S promulgada en virtud de la Ley de Valores de 1933, en su versión en vigor (en lo sucesivo, la “Ley de Valores”)). Asimismo, Robeco Institutional Asset Management B.V. (Robeco) no presta servicios de asesoramiento de inversión, ni da a entender que puede ofrecer este tipo de servicios, en los Estados Unidos ni a ninguna Persona estadounidense (en el sentido de la Regulation S promulgada en virtud de la Ley de Valores).

Este sitio Web está únicamente destinado a su uso por Personas no estadounidenses fuera de Estados Unidos (en el sentido de la Regulation S promulgada en virtud de la Ley de Valores) que sean inversores profesionales o fiduciarios profesionales que representen a dichos inversores que no sean Personas estadounidenses. Al hacer clic en el botón “Acepto” que se encuentra en el aviso sobre descargo de responsabilidad de nuestro sitio Web y acceder a la información que se encuentra en dicho sitio, incluidos sus subdominios, usted confirma y acepta lo siguiente: (i) que ha leído, comprendido y aceptado el presente aviso legal, (ii) que se ha informado de las restricciones legales aplicables y que, al acceder a la información contenida en este sitio Web, manifiesta que no infringe, ni provocará que Robeco o alguna de sus entidades o emisores vinculados infrinjan, ninguna ley aplicable, por lo que usted está legalmente autorizado a acceder a dicha información, en su propio nombre y en representación de sus clientes de asesoramiento de inversión, en su caso, (iii) que usted comprende y acepta que determinada información contenida en el presente documento se refiere a valores que no han sido inscritos en virtud de la Ley de Valores, y que solo pueden venderse u ofrecerse fuera de Estados Unidos y únicamente por cuenta o en beneficio de Personas no estadounidenses (en el sentido de la Regulation S promulgada en virtud de la Ley de Valores), (iv) que usted es, o actúa como asesor de inversión discrecional en representación de, una Persona no estadounidense (en el sentido de la Regulation S promulgada en virtud de la Ley de Valores) situada fuera de los Estados Unidos y (v) que usted es, o actúa como asesor de inversión discrecional en representación de, un inversión profesional no minorista. El acceso a este sitio Web ha sido limitado, de manera que no constituya intento de venta dirigida (según se define este concepto en la Regulation S promulgada en virtud de la Ley de Valores) en Estados Unidos, y que no pueda entenderse que a través del mismo Robeco dé a entender al público estadounidense en general que ofrece servicios de asesoramiento de inversión. Nada de lo aquí señalado constituye una oferta de venta de valores o la promoción de una oferta de compra de valores en ninguna jurisdicción. Nos reservamos el derecho a denegar acceso a cualquier visitante, incluidos, a título únicamente ilustrativo, aquellos visitantes con direcciones IP ubicadas en Estados Unidos.

Este sitio Web ha sido cuidadosamente elaborado por Robeco. La información de esta publicación proviene de fuentes que son consideradas fiables. Robeco no es responsable de la exactitud o de la exhaustividad de los hechos, opiniones, expectativas y resultados referidos en la misma. Aunque en la elaboración de este sitio Web se ha extremado la precaución, no aceptamos responsabilidad alguna por los daños de ningún tipo que se deriven de una información incorrecta o incompleta. El presente sitio Web podrá sufrir cambios sin previo aviso. El valor de las inversiones puede fluctuar. Rendimientos anteriores no son garantía de resultados futuros. Si la divisa en que se expresa el rendimiento pasado difiere de la divisa del país en que usted reside, tenga en cuenta que el rendimiento mostrado podría aumentar o disminuir al convertirlo a su divisa local debido a las fluctuaciones de los tipos de cambio. Para inversores profesionales únicamente. Prohibida su comunicación al público en general.

No estoy de acuerdo