Emerging Markets Show Resiliency After Volatile 2015

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By Richard Westlund

It may be time to move emerging market equities and debt to the buy side of your portfolio. After a tumultuous year with heavy financial outflows, most of the leading players have achieved at least some degree of stability, and the long-term outlook remains highly favorable.

"We are encouraged by the resiliency of emerging markets across the board," says Dr. Ricardo Adrogué, head of the Emerging Markets Debt Group at Babson Capital Management. "Our global team of analysts has found economic and political adjustments, even in the weaker and less developed countries. Unlike the past, there has been no sense of crisis, even in Brazil, where the political system has shown its strength in the ongoing corruption investigation."

Rajiv Memani, chairman of the Global Emerging Markets Committee, Ernst & Young LLP (EY), agrees. "While 2016 got off to a shaky start, in recent months, conditions appear to be stabilizing," he says. "Oil and commodity prices have firmed up a bit, and the macroeconomic environment in emerging markets has improved."

A recent report from Lazard Asset Management found that emerging market equities gained 5.8 percent in U.S. dollar terms in the first quarter due to more favorable global economic conditions. The report noted that emerging markets currencies appreciated against the U.S. dollar for the first time since last October.

Memani adds that investment capital is starting to flow back into the emerging markets. "We expect continued strong investment inflows at least through the third quarter of the year," he says. "That could, of course, change if the Federal Reserve changes its monetary policy stance."

One positive factor is that emerging markets now have about $8 trillion in U.S. dollar reserves, says Memani. That provides a degree of protection against unexpected events while also supporting local and international stock and bond markets.

乐观的另一个原因是，即使全球贸易的美元价值下降，过去一年，全球进出口的实际量也表明了一个小但显着的增加。“这支持我们的信念，即新兴市场的前景将在未来12个月内积极积极，”Adrogué说。

Asked what are the most attractive markets for investors, Memani says India is likely to lead the BRIC (Brazil, Russia, India and China) nations in economic performance this year, helped by its political stability, GDP growth, a positive impact from declining ecommodity prices and a large consumer market. Elsewhere, Mexico, Eastern Africa and Indonesia will also offer appealing investment opportunities, he says.

China has a strong balance sheet with high international reserves, and its government can react quickly should problems arise, which may reduce the risks for international fixed-income investors, says Adrogué. "China has been moving toward a domestic-driven economy for the past three years – an adjustment that has been indirectly financed by other emerging markets in the form of lower commodity prices," he says.

Adrogué also sees opportunities in the investment-grade sovereign market in countries like Indonesia, South Africa, Mexico and Colombia. While they have been affected by lower commodity prices and currency depreciations, they also have strong local markets that cushion those effects, and their sovereign debt remains at investment grade with ratings of BBB or above. "All of these countries offer significant yield premiums to U.S. Treasuries without exposing investors to an unreasonable amount of risk, in our opinion," Adrogué says.

Looking ahead, Memani says macro-economic policy has improved in many of the emerging markets. "There is a greater focus on deregulation, ease of doing business, greater transparency and changes to tax laws that make them more attractive to institutional investors," he says. "Over the long term, the emerging markets will continue to drive global growth."