Why we’re optimistic about Emerging Markets

By Jorry Rask Nøddekær, Manager of Nordea 1-Emerging Stars Equity Fund 

In general we remain quite optimistic on the outlook for emerging markets, not only for the second half of the current year, but also the next few years as far as we can see in our “fundamental driven crystal-ball”. Emerging Markets (EMs) in general have rebalanced their economies significantly since they come out of the global financial crisis and had the “taper risk” in the summer of 2013. And since then we have been positive in this market. In economic terms, we see attractive long term valuation opportunities, particularly for quality growth companies. We also see a stronger economic growth in EMs over the medium to long term, with significant less debt relative to Developed Markets (DMs). Additionally, external balances are generally in good shape across the different countries and EM FX looks fundamentally very cheap.

We also believe there are certain trends that will benefit EMs in the next years. For instance, the urbanization trend that is becoming more and more solid across several Asian countries, especially in India, can result in very attractive investment opportunities. We can also see that technology adoption, financial inclusion and rising education levels in EMs can lead to structural productivity gains, much more attractive than in DMs. And finally, there is space for government reforms in this region, as it is already happening in India.

Historically, EMs has delivered a high return from an operational matrix and we believe this will continue and it may be one of the reasons for a re-rating. Furthermore, we see a strong case for a Free Cash Flow and dividend story coming out of particular Asia. Moreover, local equity market participation is rising fast in EMs and in our view this will contribute to a vibrant and dynamic equity market in the years to come. In fact we estimate that by 2030, EMs will account for 40% of the global equity benchmark (today it represents 11%). However, it is important to note that despite of our positive outlook we are still talking about EMs. In other words, do not expect a “straight line”: be long term focused and take advantages of short term volatility.

Within BRICS we favor India and China from a long term perspective. We think that both countries have a very strong bottom-up story as well as a good top-down one. Beside of offering a lot of really great stock picking opportunities, you do also have Mr. Modi and Mr. Xi, respectively, controlling and helping to drive the economic growth agenda forward. With regards to a more short term perspective, our view is that the international as well as local investor base will not “walk away” and we do see a very favorable risk/reward here.

In Russia we see a very cheap and a very bottom-up market, where you can find some good companies. In our opinion, political risk will always be around and the economic growth outlook is less compelling that in many of the Asian markets. For a short term view we do remain relative positive on the stock picks we have there: they have an attractive valuation and earnings outlook is good.
Brazil is a difficult market: on one hand it does offer some interesting growth opportunities and there are some great companies, but on the other there are high political risks and it’s a country with a cautious long term debt balance situation that needs to be well managed. With this, we are cautiously optimistic on the country.
South Africa and Turkey are the only two EMs countries where we are directly negative from a structural perspective.

Fundamentally the BRICS – and particular EMs in general – should not be negatively impacted by Fed rate hikes/balance sheet contraction. We must assume that Fed only act if they see acceleration in the economic growth outlook, and that will be good for EMs. From a capital flow perspective, we see current account balances, equity valuation, EPS growth differentials between EMs and DMs and the interest yield differential being at such levels that fundamentally there should be absolute no pressure on EMs (BRICS) if the Fed takes some decision in December. Furthermore, the USD debt funding situation in EMs is also very different today from what it was back in 2013. However, we do acknowledge that there is a reasonably high likelihood that there are a number of investors that will go by the traditional way of investing in EM, and with that we cannot rule out some volatility events in the 2H17 where we get closer to Fed potential action time. If this occurs we see it as something that will be very short term driven, as they will be “betting against fundamentals”. We would further expect with a reasonably high likelihood that any potential rate hike by Fed would be meet relative quickly by a flattening yield curve, as we have seen indications of in the past, and this will again in our opinion give support to a case for EMs seen from a more global market perspective.

Finally, we must admit that we do see fewer arguments for a Fed rate hike – even if it does remain our base that we will get one – there is no inflationary pressure in the American economy.

About Nordea Asset Management
Nordea Asset Management (NAM, AuM 219 bn EUR*), is part of the Nordea Group, the largest financial services group in Northern Europe (AuM 332 bn EUR*). NAM offers European and global investors exposure to a broad set of investment funds. We serve a wide range of clients and distributors which include banks, asset managers, independent financial advisors and insurance companies.

Nordea Asset Management has a presence in Cologne, Copenhagen, Frankfurt, Helsinki, London, Luxembourg, Madrid, Milan, New York, Oslo, Paris, Sao Paulo, Singapore, Stockholm, Vienna and Zurich. Nordea’s local presence goes hand in hand with the objective of being accessible and offering the best service to clients.

Nordea’s success is based on a sustainable and unique multi-boutique approach that combines the expertise of specialised internal boutiques with exclusive external competences allowing us to deliver alpha in a stable way for the benefit of our clients. NAM solutions cover all asset classes from fixed income and equity to multi asset solutions, and manage local and European as well as US, global and emerging market products.

*Source: Nordea Investment Funds, S.A., 30.06.2017

Nordea Asset Management is the functional name of the asset management business conducted by the legal entities Nordea Investment Funds S.A., Nordea Funds Ltd and Nordea Investment Management AB (“the Legal Entities”) and their branches, subsidiaries and affiliated companies. This document is intended to provide the reader with information on Nordea’s specific capabilities. This document (or any views or opinions expressed in this document) does not amount to an investment advice nor does it constitute a recommendation to invest in any financial product, investment structure or instrument, to enter into or unwind any transaction or to participate in any particular trading strategy. This document is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instruments or to participate to any such trading strategy. Any such offering may be made only by an Offering Memorandum, or any similar contractual arrangement. Consequently, the information contained herein will be superseded in its entirety by such Offering Memorandum or contractual arrangement in its final form. Any investment decision should therefore only be based on the final legal documentation, without limitation and if applicable, Offering Memorandum, contractual arrangement, any relevant prospectus and the latest key investor information document (where applicable) relating to the investment. The appropriateness of an investment or strategy will depend on an investor’s full circumstances and objectives. Nordea Investment Management recommends that investors independently evaluate particular investments and strategies as well as encourages investors to seek the advice of independent financial advisors when deemed relevant by the investor. Any products, securities, instruments or strategies discussed in this document may not be suitable for all investors. This document contains information which has been taken from a number of sources. While the information herein is considered to be correct, no representation or warranty can be given on the ultimate accuracy or completeness of such information and investors may use further sources to form a well-informed investment decision. Prospective investors or counterparties should discuss with their professional tax, legal, accounting and other adviser(s) with regards to the potential effect of any investment that they may enter into, including the possible risks and benefits of such investment. Prospective investors or counterparties should also fully understand the potential investment and ascertain that they have made an independent assessment of the appropriateness of such potential investment, based solely on their own intentions and ambitions. Investments in derivative and foreign exchange related transactions may be subject to significant fluctuations which may affect the value of an investment. Investments in Emerging Markets involve a higher element of risk. The value of the investment can greatly fluctuate and cannot be ensured. Investments in equity and debt instruments issued by banks could bear the risk of being subject to the bail-in mechanism (meaning that equity and debt instruments could be written down in order to ensure that most unsecured creditors of an institution bear appropriate losses) as foreseen in EU Directive 2014/59/EU. Published and created by the Legal Entities adherent to Nordea Asset Management. The Legal Entities are licensed and supervised by the Financial Supervisory Authority in Sweden, Finland and Luxembourg respectively. The Legal Entities’ branches, subsidiaries and affiliated companies are licensed as well as regulated by their local financial supervisory authority in their respective country of domiciliation. Source (unless otherwise stated): Nordea Investment Fund, S.A. Unless otherwise stated, all views expressed are those of the Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches, subsidiaries and affiliated companies. This document is furnished on a confidential basis and may not be reproduced or circulated without prior permission and must not be passed to private investors or any investors not covered by relevant regulation. This document contains information only intended for professional investors and eligible investors and is not intended for general publication. This document may not be reproduced or circulated without prior permission. Reference to companies or other investments mentioned within this document should not be construed as a recommendation to the investor to buy or sell the same, but is included for the purpose of illustration. The level of tax benefits and liabilities will depend on individual circumstances and may be subject to change in the future. © The Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches, subsidiaries and/or affiliated companies.

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