Emerging Markets: Navigating change for potential opportunities
- We think emerging markets may remain volatile through mid-year.
- We believe emerging-market economic growth will be mixed in 2014.
- We think there are several areas of potential opportunity.
Frederick Jiang, CFA, CPA
Jonas Krumplys, CFA
Concerns about economic growth in emerging markets caused widespread selling in global equities markets in recent sessions, including in the U.S. but we still see opportunities in the emerging world. Ivy Funds' portfolio managers Frederick Jiang and Jonas Krumplys explain the recent activity and assess current issues and potential in several key countries.
Many investors believe the "tapering" in the Federal Reserve's economic stimulus program will lead to higher interest rates in the U.S. and thus a stronger dollar. That combination in the past often has been a negative factor for emerging-market equities, as most flows are from dollar-based investors.
However, we have not seen that response to the Fed's tapering so far. The yield on the 10-Year U.S. Treasury is down to about 2.7% from 3% at the end of 2013 and the dollar index is near the level of a year ago.
While we think emerging markets may remain volatile through mid-year, we also believe their underperformance versus developed markets may hit bottom in the first half.We think there are several areas of potential opportunity in emerging markets and are watching countries, sectors, industries and individual securities that can affect their growing domestic-consumption demands.
Recharging emerging economies
Economic and policy uncertainties vary across emerging markets and we believe emerging-market economic growth will be mixed in 2014. In summary:
- China has announced plans for a series of economic reforms that we think could provide market support later this year or next year. Its economy has slowed somewhat, but we expect gross domestic product to grow about 7.6% this year.
- We think countries including South Korea, Taiwan and Singapore will benefit from better growth in developed markets.
- The central bank in Turkey raised interest rates in a surprise move on Jan. 28. We believe the savings rate is too low and the current account deficit and inflation rate are too high. Turkey's economy can maintain positive growth through a higher export component, which would address these negatives.
- The outcome of India’s elections this year will be a key factor for both future economic growth and market performance there, as economic reforms would boost growth.
- Elections scheduled for July in Indonesia will mean a change in leadership, since the incumbent president cannot run for a third term. In our view, new leadership could open the door for further economic and market reforms.
- We think Mexico will benefit from its proximity to the U.S. wages are relatively low, there is a short lead-time supply chain to the U.S., demographics are positive for growth and Mexico has underdeveloped natural gas and deep-water oil reserves.
- Argentina has worked to ease its financial problems by allowing its currency to weaken, reducing capital controls for individuals and raising interest rates, but we think more needs to be done. In our view, the government can address its economic issues by raising central bank rates further and reducing subsidies for gasoline, diesel, electricity and other goods.
- Elections are scheduled this year in Brazil, South Africa and Turkey, but we think they are unlikely to be game changers for those economies. Venezuela also is in a difficult position. The national oil company, PDVSA, is the major source of revenue but a combination of nearly free gasoline to the domestic market and low-cost oil to countries considered “partners of Chavez” has led to a foreign reserve crunch. The current inflation rate is more than 50%. In general, we think the situation calls for a complete reversal of current policies, but the government has not indicated it will take such action.
The Ivy Funds investment team meets daily to analyze the ongoing developments in these and other emerging markets on behalf of our investors. We continue to believe that disciplined research and data-driven analysis are the keys to identifying potential opportunities and avoiding unnecessary risks around the world.
Frederick Jiang and Jonas Krumplys are the portfolio managers of the Ivy Emerging Markets Equity Fund.
Past performance is not a guarantee of future results. The opinions expressed in this article are those of the portfolio managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through Feb. 5, 2014, are subject to change at any time based on market conditions or other factors, and no forecasts can be guaranteed.
Investment return and principal value will fluctuate, and it's possible to lose money by investing. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets.
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