By Joachim Fels
Emerging markets have been quietly undergoing positive, fundamental change. From negative interest rates to Brexit to the Fed, investors have understandably been preoccupied with matters at hand lately.
From negative interest rates to Brexit to the Fed, investors have understandably been preoccupied with matters at hand lately. But it may be a good time to shift focus and look longer term: Over the past few years, emerging markets (EM) have been quietly undergoing positive, fundamental change that we think will likely increase value in the asset class.
To be sure, EM is a heterogeneous asset class with many different country stories, and the transition in emerging economies is not complete yet. However, EM looks increasingly attractive, especially compared to many advanced economies and markets. Here’s the short version why (for the in-depth version see my colleagues’ Viewpoint: “A Constructive Case for Emerging Markets”):
First, there is an encouraging trend toward more structural reforms and less populist policies in a number of EM countries at a time when populism is on the rise in many advanced economies. Argentina and Brazil have recently seen changes in government that promise more market-oriented reforms. And India made a big step towards a landmark tax reform in early August. Better policies and governance are an important precondition for lowering the risk premium on EM assets.
Progress on structural reform is highly significant. For the past four years, like many, I haven’t seen much value in emerging markets from a fundamental perspective. Manoj Pradhan and I noted in a research paper, “The Broken EM Growth Model,” in 2012: “There is a deeper structural issue that is now being exposed: The traditional EM growth model is broken and the transition to a new model – a rebalancing of EM economies – isn’t going anywhere … a successful switch towards a new growth model requires serious structural reforms.”
Better environment for emerging markets
With the U.S. dollar bull-run behind us following the informal February “Shanghai co-op” agreement and commodity prices having broadly stabilized, the external environment has also become less hostile for EM, which has allowed many central banks to ease policy. This bodes well for some cyclical recovery, especially in places like Brazil and Russia that have been mired in recession.
In addition, while the worry in developed markets (DM) is monetary policy exhaustion, most EM central banks have ample room to ease if needed as inflation is either below target or, where it is not, has peaked and is on its way down.
Finally, most risky DM assets are expensive, and investors have to come to grips with “lower-for-longer” DM rates. This, together with better EM fundamentals underway, suggests to me that the EM rally that started earlier this year has legs to run.
For timely insights into the macroeconomic factors affecting markets and investors, click on the PIMCO blog.
Joachim Fels is a managing director and global economic advisor at PIMCO.
Past performance is not a reliable indicator of future results. This communication is issued by PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862 (PIMCO Australia) and is intended to provide general information only. This communication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation and needs. Neither PIMCO Australia nor any of its related bodies corporate make any representations or warranties, express or implied, as to the accuracy or completeness of any of the information contained in this communication. To the maximum extent permitted by law, neither PIMCO Australia nor its directors, employees, agents, representatives or advisers accepts any liability whatsoever for any loss arising from the use of information in this communication.
Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Certain U.S. government securities are backed by the full faith of the government. Obligations of U.S. government agencies and authorities are supported by varying degrees but are generally not backed by the full faith of the U.S. government. Portfolios that invest in such securities are not guaranteed and will fluctuate in value. Equities may decline in value due to both real and perceived general market, economic and industry conditions. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.
This material contains the opinions of manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2016, PIMCO.
Investor Daily will be hosting a week dedicated to portfolio allocation and showcasing a range of top fund managers’ opinions on some of t...
Promoted by JP Morgan ...
Promoted by Cashwerkz. Innovation in cash management platform technology provides a new way to research, manage, transact and switch invest...