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2018 outlook: asset managers on EMs

Asset managers are interested in companies that cater to local brands and locally produced goods

Emerging markets equities

Emerging market earnings growth has improved and the near-term threat of a more protectionist approach to trade policy has diminished.

Data from the Institute of International Finance showed that capital flows into the sector will reach $1.1 trillion in 2017 from investors residing outside of the region.

Citywire Asia takes a look at the 2018 outlook for emerging market equities. The next few slides present views from top asset managers for Asia.

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Anh Lu
Lead portfolio manager
Asia ex-Japan equity strategy
T. Rowe Price

Thomas Poullaouec
Head of multi-asset solutions APAC
T. Rowe Price

The emerging market earnings growth has improved and the near-term threat of a more protectionist approach to trade policy has diminished.

While emerging market valuations are modestly above historical averages, they appear less expensive compared to developed markets. However, the potential for renewed declines in energy and other commodity prices is a downside risk.

 

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Chetan Sehgal, CFA
Executive vice president, director of global emerging markets
Franklin Templeton Investments

Within emerging markets, Asia is the most exciting region. It offers a range of opportunities from China, South Korea, India, and Taiwan to countries like Indonesia.

As fundamental stock pickers, Franklin Templeton is equally excited about individual opportunities in other parts of the world, such as Russia, which has recently fallen out of favour. Similarly, the firm is also finding emerging market opportunities in Latin America, such as Brazil and Argentina.

Top themes within emerging markets, according to the executives, are technology and consumption. Opportunities in the IT sector include e-commerce business models as seen in Latin America; companies that develop automobile-related IT components out of Taiwan or South Korea; and digital banks in Asia and Africa.

The asset manager also likes consumer-related sectors. It believes the demand for goods and services is set to skyrocket as emerging market household income continues to grow.

From an investment perspective, Franklin Templeton is especially interested in companies that caters to local brands and locally produced goods.

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Mauro Ratto
Head of emerging markets
Amundi

Although Amundi expects a slowdown in the current strong macroeconomic momentum, it maintained a positive outlook for emerging markets.

Fiscal and financial conditions, with few exceptions, are quite stable across all regions on the back of the reforms implemented over the last three to four years, facilitated in some cases by the overall improvement in the global environment, Mauro Ratto noted.

For the first time since 2010, emerging markets are experiencing earnings upgrade across the board, with earning per share growing by mid-double digits versus 10% expected at the beginning of the year.

This performance has been driven by a recovery in the material and energy sectors, the increasing relevance of IT consumer-facing stocks, and a reacceleration in the industrial sector, led by the synchronised global recovery.

This scenario is expected to continue in 2018, as no major changes are forecast in the macro outlook and the firm does not foresee any political shifts.

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John Bilton
Global head of multi-asset strategy
JP Morgan Asset Management

JP Morgan’s 2018 GDP growth estimates of 1.5% in developed markets and 4.5% in emerging markets are unchanged from last year.

According to John Bilton, the cyclical positioning of the business cycle translates into rather modest equilibrium return expectations for most asset classes. Alpha opportunities are widely spread across asset classes.

The asset manger’s equity assumptions call for lower expected returns in developed markets and emerging markets. The gap between emerging market and developed market equity returns has narrowed marginally compared to its view for 2017.

‘We see returns over our time horizon falling modestly but steadily behind what historical experience would suggest,’ Bilton added.

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Arthur Kwong
Head of Asia Pacific equities
BNP Paribas Asset Management

BNP Paribas remains selectively overweight in emerging markets in Asia, such as India, Indonesia, Philippines, as well as prudent in certain developed countries in Asia. Particularly in China, the firm continues to stick to companies with a strong brand value and limited competition.

Asian equities have performed well over the first ten months of 2017, returning more than 30% in US dollar terms. After such gains, it is natural to assume that the firm  may see some moderation in the coming months, Arthur Kwong said.

A number of key factors driving this uptrend remain in place – the weaker US dollar, China’s better outlook for growth and improving results from supply-side discipline at the company level – although these may change over the rest of the year.

While real GDP growth for Asia is expected to remain relatively flat year-on-year, Asia continues to deliver higher growth versus other regions, he noted.

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Francis Scotland
Global head of macroeconomics
Brandywine global

A powerful combination which includes stimulus measures, benign inflationary pressures and the expectation that developed market central banks will go slow in removing monetary policy stimulus, will help sustain global growth and provide a recipe for continued outperformance of emerging markets, according to Francis Scotland.

He said many emerging markets have made incredible strides in curbing inflation, enacting much-needed economic and political reforms, boosting their current accounts, and improving levels of foreign reserves.

Unlike developed markets, central banks in the emerging markets still have room to lower interest rates should the need arise.

However, Brandywine’s constructive view on emerging markets would be immaterial without a corresponding favourable outlook on China. China remains a key driver of sustainable global growth, and the group expects continued, steady expansion into 2018.

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Kim Catechis
Head of emerging markets
Martin Currie

Improvement in the emerging markets sector is broad-based, initially concentrated in the energy and materials sectors and extended into industrials, consumer discretionary and financials.

Megatrend of fintech stocks is the best option in emerging markets, Kim Catechis noted, adding that ‘companies like Naspers, Alibaba and Tencent are building robust digital ecosystems – competitive ‘moats’ that ensure that they can continue to tap into expanding demand domestically and increasingly abroad.

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