Murat Ulgen, global head of emerging markets research at HSBC, said: “While we expect some improvement in growth going into 2016, financial and economic woes in China, their impact on commodity prices, and looming rate hikes in the US present clear downside risks.”
However, allocators stress there is a wide range of countries to pick from in the emerging market universe.
Emily Whiting, of the JPMorgan Asset Management emerging market equities team, cited India as being particularly well-positioned to benefit from a combination of favourable demographics and entrepreneurial spirit.
Gary Greenberg, manager of the Hermes Global Emerging Markets fund, believes the fundamental case for picking many of the biggest businesses is still compelling. “The environment remains positive for innovative and well-run companies,” he said.
However, he added that he is not yet optimistic on the broader case for markets such as Brazil, South Africa, Russia and Mexico “given a combination of valuation, macro and political uncertainty, as well as earnings risk”.
For many, emerging markets remain at heart a currency play, and those currencies have been similarly depressed in recent years. But here, too, the balance may be shifting – even with the risk of a US rate hike looming.
“The chances of a total collapse of Asian economies, reflected in their currencies, seems unlikely to us, as the economies have developed massively in the past 20 years, debt levels are not ludicrous, and from an investment perspective, regional equity valuations are cheap,” said Psigma CIO Tom Becket.
“The pendulum is swinging for all EM assets from the risk of owning them to the risk of having none, or majorly underweight allocations. Global investor positioning has become extreme.”
