Emerging market assets have rallied strongly since late 2018. But is this justified? And should we differentiate between the fundamentally stronger and weaker economies?
Emerging market assets (EM) have recovered from their 2018 slump, thanks to a favourable combination of lower expectations for US interest rates, growth stimulus in China, and a ceasefire in the trade war.
Emerging markets with the strongest fundamentals rallied first, but now even the economies with lingering weaknesses are enjoying a recovery, in part thanks to strong inflows into dedicated EM funds since the start of 2019. While we think that the EM rally is justified, a degree of complacency and overextended positioning may be sowing the seeds for another correction.
I believe this risk calls for active differentiation between EM investment opportunities, in particular looking for selective hedges (in the weaker economies) against another broader EM market downturn.
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