Emerging markets should possess a lot of buying opportunities given the positive outlook going forward, Sean Taylor, chief investment officer Apac at Deutsche Asset Management has said.
Speaking at a press conference held in Singapore on Wednesday, Taylor said EMs, including Asian equities, have done pretty well this year.
‘The difference compared to developed markets is that any correction in EMs would present buying opportunities.
‘Why we like EMs and Asian markets at the moment is because the macroeconomic conditions are much better. There are two main drivers of these conditions.
'The first reason is that Chinese growth is clearly more stable than what investors thought six months ago. We have this cyclical pickup in export growth, which is very positive.
‘Secondly, this is the first time in four or five years that we have been positive on EM earnings growth. So we are actually forecasting 12% earnings growth this year for EMs. We are much more confident this year that we will get positive figures compared to previous years.
‘We have got a lot of core drivers for EMs and Asian earnings growth there. EM FX will not be expecting a huge dollar rally and a lot of it has already happened. We are not expecting commodities to collapse and the prices will roughly be the same.
‘In the oil sector, we actually have more demand than supply in all markets. Although we are going through corrections, we think that will stabilise.’
Taylor also said from a bottom-up perspective, he is seeing positive changes at the corporate governance level as well as at state-owned-enterprise reform level. 'For example, we see improvements in Japan and Korea.'
Asian monetary policies
In EMs, particularly in Asia, Taylor is not expecting any more interest rate cuts, though last year, he expected markets such as Thailand, Indonesia, Korea, Taiwan and China would cut more rates.
‘We now believe because of growth and inflation picking up, and what’s happening in the US monetary policy, we have come to the end of interest rates cut in Asia, which will have implications on asset classes in different markets.’
The Deutsche Apac CIO is selectively keen on EMs for sovereign debt and credit. ‘We do see more funds flows go into EMs, selectively into the fixed income sector, as it is looking cheap relative to developed fixed income.'
'The difficulties in fixed income are that firstly, there is no yield in Japan, no yield in Korea, and even the corporate side does not have much pickup to get credit. No one is interested in yields in Thailand or the Philippines as well.
‘We are positive on Indian bonds, which have got carry. Indonesian bonds have also got carry.'
In Europe and the US, Taylor clearly prefers credit to sovereign.
Moreover, he is strategically overweight investment grade in the US, and a bit selective on high yield.
‘Now we think high yield have gone a little bit too far and we are just a bit cautious tactically on US high yield. You don’t have the pickup in high yield to take the risk at the moment, so it's better to stay in investment grade.’