Emerging markets have faced a challenging three years. However, there are still some good markets to watch, despite what may be happening with the new “friend-shoring” policies that are emerging, says an article on Wealth Professional.
Emerging markets have faced a challenging three years. However, there are still some good markets to watch, despite what may be happening with the new “friend-shoring” policies that are emerging, says an article on Wealth Professional. “The trajectory for emerging market countries over the last three years has been more challenged, which also means that the downside risk is a lot lower, whereas we believe developed countries are still earning profit margins above historical ranges and there’s still room for normalization, especially as we head into a potential recession and input prices start to come down,” says Christine Tan, assistant vice-president of portfolio management for SLGI Asset Management. “You’re definitely going to lose pricing power. It just depends on how quickly and how much,” she says. From a bottom up perspective, the sentiment, earning power, and pricing power of emerging market companies has been less, which means that, even though the economy is slowing, there is room for some central banks in emerging markets, like Brazil, to cut interest rates this year since they’re significantly higher than inflation. While profit margins and earnings levels are quite low “coming off of three years of pretty challenging domestic demand, because of the lack of significant stimulus, you have valuations that are on the upper end of the historical range for emerging market equities. But, if you drill down into specific countries, it’s really only a few countries that are expensive. A lot of the other countries are actually trading at pretty attractive valuations, compared with other regions of the world, where valuations are still quite elevated, with significant downside risk to earnings,” says Tan. She added that the International Monetary Fund (IMF) has flagged concerns with the new “friend-shoring” policies that are emerging, most notably in recent US administration speeches. ‘Friend-shoring’ is the act of manufacturing and sourcing from countries that are geopolitical allies. Janet Yellen, the US treasury secretary, has been repeatedly calling for it lately and that’s raising concerns about what that will mean for companies and the markets they usually invest in.
