Fundamentals in emerging markets (EMs) are expected to continue presenting good investment opportunities for Australian investors in 2013, according to asset management solution provider ACPI Investment Managers (ACPI).
ACPI head of emerging markets and portfolio manager Alia Yousuf said that the firm favours local currency bonds, which it thinks will perform in line with local growth and inflation dynamics.
“Inflation indicators are pointing firmly down in most major EM countries while they are increasingly able to finance their current account deficit with hard currency bonds issuance,” she said.
Ms Yousuf explained that with developed market central banks continuing their balance sheet expansion, emerging market currency risk is becoming less of a concern.
“Hefty capital inflows are likely to generate appreciation pressure on currencies. Until the growth cycle has fully stabilised, markets are likely to find central banks competing to create liquidity and ward off appreciation pressure. This will further fuel local bonds,” she said.
India in particular, is tipped to be a country with strong investment opportunities in 2013. The Reserve Bank of India (RBI) is expected to deliver a 50-basis points (bps) cut by April 2013, which will further support investment in government bonds.
The Indian 10-year government bond is also initially expected to move towards a fair value range of 7.65 to 7.80 per cent by the first quarter of 2013.
“In terms of inflation, the headline Wholesale Price Index (WPI) trajectory appears to be heading in the right direction, below the seven per cent mark, despite the higher readings expected in December and January,” ACPI chief investment manager of fixed income Steven O’Hanlon said.
“This should therefore allow the RBI to cut rates and still maintain a positive real repo rate (nominal rate minus inflation) of at least 50 bps. We believe it would ensure that the ‘real repo’ rate remains positive for the majority of this year,” he said.
ACPI also anticipated growth in Latin America to grow faster in 2013, driven in part by Brazil’s pro-growth program and Mexico’s implementation of new reforms.
Resilient growth in the Asian region is also expected into the next 12 months, despite the slowdown in China.
But regions such as eastern Europe and Africa and the Middle East still hold uncertainty and risk due to ongoing low growth in the Euro area, presidential elections in Israel and risk of strike and social unrest in South Africa.
