Watch for these signs of increasing risks in emerging markets


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Nanjing Road pedestrian street in Shanghai, China. As China prepares to tighten credit, the risk to emerging markets increases.

Lintao Zhang / Getty Images

Low interest rates and expectations of a global economic recovery have recently supported emerging markets, but strategists see reasons for less optimism in the near term, at least.

While still positive on emerging market equities,

Bank of America

Hong Kong equity strategists Ajay Singh Kapur and Ritesh Samadhiya have reduced their tactical allocation to cyclical Asian and emerging market equities as some of the risks to the asset class escalate.

These risks include the start of the dollar strengthening, which poses a challenge for emerging markets, especially those dependent on foreign funding. Also potentially worrying: With more than three-quarters of global fund managers in BofA’s latest survey expecting a strong economic recovery, the potential for a surprise that bolsters markets has dried up, BofA strategists write in a note to customers.

China, which accounts for nearly 37% of the MSCI Emerging Markets Index, however, represents one of the biggest risks for the larger index. Many strategists are wary of measures taken by China to tighten credit; easy borrowing in China is often a leading indicator of global growth and cyclical stocks. Chinese regulators’ increased control over large internet and tech companies also continues to hang over the market. Indeed, the Chinese stock market has been one of the worst performers so far this year. the

iShares MSCI China

exchange-traded funds (MCHI) are down 1.2% so far this year as other markets charge more.

DataTrek Research co-founder Nicholas Colas is concerned about China’s regulatory crackdown on tech companies and also says history does not offer a bullish view of emerging markets when the Fed hikes rates. Emerging markets as a whole could be under pressure as long as markets worry about the Fed’s rate hikes and timing, he writes.

While emerging markets may not be as vulnerable to a 2013-type tantrum as the Federal Reserve begins to talk about cutting its stimulus measures, strategists at the BlackRock Investment Institute also told clients in a note. that any temporary rate hike could jeopardize emerging market assets.

This comes as a note of warning as investors looking for pockets of the market that have not factored in a global recovery look completely overseas. Portfolio managers are still finding selected opportunities in emerging markets, including commodity-rich countries like Brazil, which have largely disappeared from investor portfolios in recent years.

China’s efforts to contain soaring commodity prices and inflationary pressures, including the release of strategic reserves and the implementation of overseas trade restrictions, have undermined some of the momentum for the recovery in the economy. raw materials.

But analysts at Gavekal Research see China’s efforts as a pause rather than derailing the rise in commodities like oil and copper, for which China is more of a “price-taker” than a “price-fixer.” price ”. The data suggests that stocks of these commodities are at their lowest level in a decade, according to analysts at Gavekal, who see the recent pullback in commodity prices as a pause rather than the end of the rally.

This could be good for some resource-rich emerging markets. For investors, the choice of locations within emerging markets will continue to be paramount. In addition to countries like Brazil that could benefit from continued demand for commodities, several tourism-focused companies in Southeast Asian countries, like Thailand, could benefit as the global recovery continues. continues and that vaccination rates in countries improve.

Write to Reshma Kapadia at [email protected]


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