As emerging market (EM) equities go through an uptrend cycle after five years of declining profitability, BlackRock portfolio managers believe the outperformance is the start of a longer trend and have assigned the asset class an overweight position.
In the company’s November global equity outlook, Kate Moore, chief equity strategist noted that the past 18 months have brought a broad-based recovery, after earnings of MSCI EM Index companies had slid 7% a year since 2011.
Both new and old economy sectors, including technology, industrials, energy, have contributed to such a recovery, while EM performance has largely followed.
‘A trio of forces offers support for EM equities today: structure reforms that are leading to higher profitability, synchronised global growth fuelling improved demand, and simulative fiscal and monetary policies,’ she noted.
One example of structural improvement in Asia is India. The government’s demonetisation move in November, goods and services tax reform in July, and effort to digitalise its financial sector, have all contributed positively to the Indian equity market.
‘Equity markets in India have seen record inflows from domestic investors, at nearly $23 billion through September of this year, according to the Association for Mutual Funds in India.’
Besides structural reforms, synchronized global growth and monetary policies are the second and the third legs to provide support for EM equities. According to the firm, many EM central banks are able to cut policy rates even as the Federal Reserve normalises and other developed markets weigh cutting back accommodation.
‘We calculate seven major EM central banks, including Brazil’s and India’s, collectively delivered more than 1,000 basis points in rate cuts through October of this year.’
BlackRock experts said that financials made up nearly a quarter of the EM equity market and had lagged the high-flying tech and consumer discretionary sectors this year. However, they do not see rate cuts dragging the market down.