17 November 2016
Emerging markets update with Lazard
By James Donald, manager of the Elite Rated Lazard Emerging Markets fund
Despite growth slowing in their economies, emerging market equities' investment landscape looks strong, according to James Donald, manager of the Elite Rated Lazard Emerging Markets fund.
“Governments are moving toward more standardised economics and there has been a significant reduction in debt levels in some countries,” he says. “The move to free(r) floating currencies is creating less dramatic foreign exchange moves.
“Brazil needs some budget cuts to help it along; Russia looks good value, even after discounting political risks; and, while India is not cheap, it is expected that 60% of its infrastructure will be replaced by 2030 and there are a million people a month entering the labour market, so growth prospects remain.
“China is an issue. Debt to GDP is 260% and it is a serious problem. Demographics are also a problem in China – they will turn negative in the next seven years with more older than younger people and, regardless of the debt/government position, this will be bad for the country. The banking system is also an issue and they need to go through a very steady digestion of non-performing loans.
“On the plus side, there are strong signs that it is finally making headways into becoming a consumer-led economy. Healthcare, education, auto sales and entertainment are all areas experiencing decent growth.
“The Chinese economy is the single biggest risk in world economy, in my view, however. State-owned companies are destroying value and are being propped up by borrowed money. However, after Xi's re-election, he could have the confidence to shut them down and show better efficiency.
“Generally markets are waiting for the commodity prices floor. Any stabilisation will be a catalyst for the area to regain some ground. Another key figure will be the US Federal Reserve and its interest rate policy. The optimal situation would be 2 to 3 rises per annum of about 0.25% each.
“Don't get me wrong, emerging markets are still highly vulnerable to a global recession and crisis, but any stabilisation in commodity prices could be a catalyst for the area to regain some ground.”
Where to next?
- Investing in entrepreneurial India, with GS India Equity Portfolio fund manager Prashant Khemka
- LEARN: How to invest when the market is volatile
- What to do when oil dividends dry up, with Liontrust fund manager Stephen Bailey
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. James's views are his own and do not constitute financial advice.