Today’s emerging markets are ‘better placed to weather shocks’ than in the past, according to a research note from Silvia Dall’Angelo, senior economist at Hermes Investment Management, who argues that ‘improved financial resilience, robust policies and few new tailwinds could support a brighter 2019 across emerging markets.’
This follows a ‘challenging’ backdrop to 2018, caused by global financial conditions, slowing growth in China and ‘fraught’ US-China relations. But Dall’Angelo notes in her latest Ahead of the curve research that ‘emerging-markets stress has been confined to countries with weak fundamentals or political instability, such as Turkey, Argentina and South Africa.’
This, says Dall’Angelo ‘suggests emerging-market sovereigns should no longer be considered a single asset class’, instead arguing that they should be ‘grouped together based on different credit qualities and their ability to pay based on their external debt obligations.’
And while Dall’Angelo notes that some emerging-market economies will remain vulnerable, others will be ‘well placed’ to benefit from certain macro tail winds. These include ‘a dovish turn in the narrative from the Fed in 2019’ that has already resulted in dollar stabilization, lower oil prices following a 30 percent drop in Brent crude since October – which will benefit oil-importing economies – and proactive central bank policies.
On this last point, the report notes that ‘although vulnerabilities exist, emerging-market economies appear more resilient than they were in the past.’ Indeed, Dall’Angelo notes that much has improved across the emerging markets landscape since the global financial crisis: financial systems are more resilient and better policies have been implemented.
Drivers including fewer currency pegs, stabilized external debt ratios and tighter monetary policies ‘should limit contagion risk going forward,’ states the report, ‘but that’s not to say that in a world characterized by slower growth and increased protectionist threats, weak links do not exist – they do.’
The common denominator
Michael Chojnacki, co-founder and CEO of Closir – a corporate access platform with a focus on emerging markets – agrees that it’s increasingly difficult to put all emerging markets into a single basket.
Talking to IR Magazine, he notes that ‘each is at a different stage of the development cycle and presents fund managers with unique investment propositions and drivers. And while the general mood is indeed often set in Washington, spending time with companies in Riyadh, Cape Town, Manilla or Istanbul shows you firsthand just how differentiated the investment propositions really are.
‘Two of the largest economies of Latin America – Brazil and Mexico – are under new leadership; Saudi Arabia presents a story of change and ambitious social reform; Russia is perceived as a recovery play offering some of the most attractive dividends and valuations; Poland looks and feels like it’s graduating into developed market status.’
So what links these markets as far as investors are concerned? ‘The common denominator is one of transformation,’ explains Chojnacki, as these economies ‘increasingly evolve away from dependence on exports, commodities and state-owned enterprises and toward more resilient sources of growth. Technological advances and changes in consumer trends have been drivers of returns in many of those markets.’
When it comes to IR, Chojnacki says local IR societies and exchanges are increasingly active in promoting investor relations in emerging markets. While each market’s dependence on foreign institutional investment is a good indication of how developed IR will be in that country, Chojnacki says that ‘generally speaking, leading companies in each of the emerging markets have sophisticated IR practices very much in line with their developed market peers. At the same time, younger companies are often quick to look to their peers to embrace best practices that can easily be implemented.
‘My feeling is that the foundations are set. There is a general understanding that timely and continuous information disclosure and dialogue, management access and a long-term mind-set all help in attracting investors.’