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Is it too late to allocate to global emerging markets?

BNP Paribas Asset Management
 

Emerging markets have performed strongly since the beginning of 2017, recording a 28% gain for EM equities and a 14% rise for EM local currency debt (performance in US dollar terms as of 30/09/2017, see Exhibit 1 for the recent performance of EM equities).­

Is it too late to allocate to global emerging markets?

Exhibit 1: Performance of the MSCI Emerging Market Equity index over the last six months (end of April to end of September 2017)

IntPict_graph_2_06022018

Source: Bloomberg, BNP Paribas Asset Management, Oct 2017

Is it now too late to allocate to emerging markets?

In my view, emerging markets still seem to offer attractive investment opportunities. Firstly, the depreciation of the US dollar (see Exhibit 2) has played an important role as the performance numbers quoted above are ‘only’ +16% for equities and +2% for local currency debt when expressed in euro terms. Additionally, valuations of EM equities and EM currencies have remained more attractive than those of other asset classes, notably US ones.

Exhibit 2: Depreciation of the US dollar (as per the DXY US dollar index) over the last six months (end of April to end of September 2017)

IntPict_graph_3_06022018

Source: Bloomberg, BNP Paribas Asset Management, Oct 2017

Several emerging countries are also engaged in monetary easing which should support the local bond markets and, to a lesser extent, equity markets. Their economic cycle is less mature than in many other countries and the resumption of international trade should benefit these countries. Finally, positioning in these markets among international investors remains well below the high point reached in 2008.

Apart from (geo)political factors, the main risk we see is that of an excessively sharp rise in US interest rates with, as a consequence, a significant appreciation of the US dollar. We are continuing to reinforce our investments in these markets and we are not hedging the currency exposure.

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