The company’s investment director, global strategy Jason Hepner said that the MSCI Emerging Market Index is underperforming developed markets by more than 20 percentage points in the year to date.
However, he said that the slower pace of global growth won’t mean that all EM economies will have the same speed bumps going forward.
“Despite the worries surrounding the performance of emerging economies, it would be wrong to tar them all with the same brush,” Mr Hepner said.
“Within the EM universe, a number of economies appear well placed to cope with any declaration in global growth, with robust sovereign balance sheets and plentiful current accounts surpluses.
“On the other hand, there are other nations were external pressures are likely to make life increasingly difficult - with central banks forced into defensive action to support currencies, such as running down foreign reserves or hiking interest rates.”
Mr Hepner said that one source of optimism for global investors is the relative health of sovereign balance sheets, with emerging markets economies averaging 35 per cent on a debt-to-GDP basis compared to 110 per cent among developed markets.
However, he said this does not take into account the expansion of leverage or corporate sector debt burdens, which have been accompanying EM growth.
“These levels paint a dramatically different picture of the economy than its rather benign sovereign debt position - China’s government debt-to-GDP ratio is closer to 60 to 70 per cent, and highlights the difficulty of assessing the health of [China] using sovereign balance sheet analysis alone,” he said.
Furthermore, Mr Hepner said the current account balance of EM - which represents net foreign investment compared to the rest of the world - appears healthy on face value but that excluding China and the Middle East, the aggregate figure falls to $-50 billion.
He said, of the major EM that have an account surplus, a majority are net exporters in the Asia Pacific region, such as Taiwan, Myanmar and Korea.
Going forward, Mr Hepner said the current, more moderate growth environment still includes possibilities for strong returns in EM markets, despite the “rocky road” ahead.
“This environment presents opportunities for the investor that is capable of understanding the fundamental drivers of both macro trends and asset prices within these regions,” Mr Hepner said.
“Indeed, with assets within emerging economies now trading at a considerable discount to where they were 12 months ago, there may be opportunities for investors to add selective exposure at attractive levels if, as we expect, the second half of 2013 brings an improvement in global growth.”
