Alex Duffy, portfolio manager at the Fidelity Global Emerging Markets Fund, sees volatility continuing next year with potentially greater dispersion of returns across regions than has been seen in the last few years.
“The overarching downside risk to the asset class remains that of a sustained softening of Chinese economic activity or worse, a substantial devaluation of the RMB, and a rise in Chinese funding costs leading to pressures on asset quality within the banking system and tightening liquidity conditions,” Mr Duffy noted.
“The authorities are well aware of these risk factors and there are multiple ways in which they can mitigate them – the recent trade truce with the US is a step in the right direction.
“On the negative side, without a reasonably timely resolution to the US/China trade dispute, I see the likelihood of a devaluation of the renminbi as being quite high. Chinese equities are already discounting a reasonable part of this, however, and so I think that investors could be surprised by positive returns in Chinese stocks, despite currency devaluation.”
My Duffy highlighted the financial and materials sectors for the best opportunities in 2019. He noted the balance sheet quality of dominant, retail-facing banking models.
“These businesses look to be well-positioned to serve the pent-up demand for finance and consumption across emerging markets,” he said.
Fidelity is confident that a number of businesses in the materials sector offer attractive yields and will deliver adequate returns in the current environment and should benefit from any effort by the Chinese government to stimulate its economy.
“EM equities are finishing a difficult year at relatively-attractive valuations, and while earnings estimates in EM Asia in particular are likely to see further downward revisions, expectations are being reset for a much healthier entry point than that which we experienced in December 2017,” Mr Duffy said.