Changing financial conditions will see some parts of the emerging market take a bruising – but that doesn’t mean there aren’t any opportunities, BlackRock says.
Speaking on Wednesday, BlackRock head of active investment for Asia-Pacific Belinda Boa said that rising interest rates and a stronger US dollar were resulting in tighter financial conditions across the world.
The “cross currents” of these two factors would hit emerging markets with exposure or dependence on borrowing in dollars or “large external deficits” the hardest, according to Ms Boa.
She indicated that BlackRock nevertheless saw some opportunities across some developing economies, given the strong fundamentals.
“We need to be selective … But we still remain positive on emerging markets,” Ms Boa said.
In particular, BlackRock – which had been underweight Latin America until now – had “moved more positive on Mexico and Brazil”.
The company was also more overweight in the Asia region than any other across the emerging markets, albeit quite selective.
“We’ve been underweight Hong Kong and more overweight on some of the China reflation sectors.
“We’ve been neutral on India, although that has historically been an overweight position and I think we’ll be moving back to a more overweight position in India,” Ms Boa explained.
Indonesia has also been attractive to BlackRock, she added. “Hasn’t played out, but has been attractive to us, particularly through some of the banking names which we’re overweight.”
She added that people often underestimated the emerging market space.
“It’s so diversified but there are always opportunities. It’s not actually one homogenous market.”
“So being able to play and be selective around emerging markets is really the ability to generate alpha in this space,” Ms Boa concluded.
Speaking in an event on Wednesday, Antipodes Partners deputy portfolio manager Graham Hay echoed Ms Boa's sentiments and noted that US and European equities looked expensive.
”Comparatively, both Developed Asia – especially Japan, Korea and Taiwan – and the overall emerging market sector stand out as regions with greater return potential,” Mr Hay said.
“The market is celebrating stocks that display high growth, profitability and momentum independently of their starting multiples.
“Troubled by fears of de-synchronising global growth, investors continue to prefer the US while at the same time rotating out of low multiple stocks, or ‘value’, in favour of ‘structural growth’ and ‘quality’ exposures, irrespective of price," he concluded.