Turkey and Russia pose the biggest threats to long-term emerging market returns, according to Pictet Asset Management’s Luca Paolini.
In spite of the World Bank trimming its emerging market 2015 GDP growth forecast six days ago, to 4.4% from the December estimate of 4.8%, statistics compiled by Pictet predict that yearly EM equity returns will outstrip those of any other asset class, hitting 15.5% per annum.
Furthermore, while EM equity holds the top spot in the Pictet forecast, Asia ex-Japan equity, Latin American equity and EM local government bond index occupy the next three places, on 15.4%, 12.3% and 10.6% respectively, Portfolio reported.
“Emerging markets have a few big advantages,” said Paolini, Pictet’s chief strategist. “They are preparing for a cycle of wage growth, and we are starting to see structural reforms in India and the Philippines.
There is also some upside from the currency side. If you invest from a UK or US perspective there will be a positive currency impact. We expect emerging market currencies to appreciate after the first Federal Reserve interest rate rise.
“Obviously we are aware that if there is a big credit event then it could be a bad situation, but emerging markets are very different from 20 years ago, they have much better reserves and are much more stable.”
While Turkey and Russia lie on opposite sides of the oil price divide–the former benefitting from low commodity trading values while the latter flounders–Paolini believes they could potentially combine to collectively wield a negative impact on the wider emerging market economy.
Growing Less
“When you look at [Turkey and Russia], their market capital is not that big,” he explained. “The downside is maybe that emerging markets are growing a bit less, but also there are some specific countries that we see as potentially dangerous.
Russia has political risk, and Turkey in particular has been a beneficiary of low oil prices, which of course cannot go on forever.”
Paolini outlined the trade sanctions imposed on Russia by the US and European Union as the biggest thorn in its side, but, despite the negative impact that has resulted on the Russian economy, he did not rule out the possibility of overseas investors adapting to the situation in time.
“With certain countries there are situations [such as the Russian sanctions] where it goes on for a long time and feels like it will continue forever,” he said.
“As investors, we get used to it and do not pay attention anymore. I think it is very unlikely that the Russian sanctions will be lifted, and if anything the situation is actually getting worse.”
