A pause in US monetary tightening, a widening gap in GDP growth rates between emerging and developed markets, and stocks trading at cheap valuations could all be positive for the much-maligned asset class.
However, the threat of declining US growth – or even a long-overdue recession – or risks to Chinese growth due to the ongoing trade war continue to pose a threat to an emerging recovery, according to Mr Blokland.
“2018 wasn’t a pretty year for equity markets in general, and for emerging markets in particular,” he said. “Global stocks fell 4.1 per cent in euros, whereas emerging market equities realised a negative return of more than 10 per cent in euros.”
“But given the recent developments in markets, the odds for a solid emerging market performance from here on are pretty decent. Gradually, the pieces of the puzzle are falling into place.”
The Robeco portfolio manager said the first thing working in their favour is the path of the Fed’s monetary tightening.
“Contrary to the messages of just a few months ago, the end of, or at least a pause in, US monetary tightening is now on the table,” says Blokland. “After a period of three years, during which the Fed has made nine rate hikes, Chairman Jerome Powell has changed direction in his recent speeches to embracing a more neutral policy,” he said.
“As current market circumstances aren’t particularly favourable, it seems likely that the Fed will take a break from further raising rates. This means that the difference between interest rates in the US and, for example, the Eurozone will not widen further.”
According to Mr Blokland, this means that the US dollar – which is already overvalued – won’t necessarily strengthen,
as the attractiveness of a currency largely depends on interest rate differences between two regions.
“This is an important development for emerging markets, as a stronger US dollar often coincides with lackluster emerging market performance.”
One of the major macro themes to impact global equities in 2018 was the US-China trade war. Emerging markets are particularly vulnerable to a slowing in global trade, Mr Blokland said, which is probably why they started to decouple from global equities from June onwards as the dispute escalated. However, he noted that the effect of the currency crisis in Argentina and Turkey should not be ruled out.
“In recent months, however, both parties seem to have refocused on de-escalation. A temporarily truce was declared: China lowered tariffs on some US imports, and President Trump offered some willingness to come to an agreement,” Mr Blokland said.
“While that doesn’t necessarily mean the dispute is fully solved, it does mean that the marginal effect on trade and GDP growth will decrease. When this happens, we expect emerging market stocks to be among the main beneficiaries.”
