GLOBAL WEEKLY COMMENTARY

Reasons to like emerging markets

05 dic 2016 / por Richard Turnill

Key points

  • Risks to emerging market (EM) assets have increased, but we see positives outweighing the risks and supporting a selective approach.
  • The Organization of Petroleum Exporting Countries (OPEC) agreed to cut supply, driving oil prices and energy stocks higher.
  • This week could bring clarity on the outlook for European Central Bank asset purchases.

Risks to EM equities and bonds have increased since the U.S. election, with the incoming Trump administration’s policies on trade uncertain. Yet a cyclical growth pick-up benefitting EMs outweighs these risks for now, we believe, and supports selectively investing in EM assets.

Chart of the week
Emerging market debt, equities and industrial metals performance, 2016

Emerging market debt, equities and industrial metal performance

EM equities and bonds took a hit immediately after the U.S. election, as investors feared the new administration would be negative for global trade and capital flows. As the chart shows, industrial metals and other commodities quickly rebounded on hopes for increased infrastructure spending and amid signs of a pick-up in global growth.

Scope to play catch up

EM assets have stabilized somewhat but lagged a recent rally in commodities. Our conviction is that U.S.-led reflation – rising wages, nominal growth and inflation reinforced by an expected shift to fiscal stimulus – should be a big positive for many EM assets. Greater infrastructure spending should boost demand for the commodities exported by EM producers.

Risks abound in the short term, including a sharper rise in U.S. Treasury yields and the U.S. dollar as well as a quicker fall in China’s yuan. But we believe a gradual Federal Reserve, wary of tighter financial conditions, should limit dollar gains from here. Over the past three years, EM assets have already weathered an economic downturn and dollar appreciation: Currencies are weaker and current account balances are generally in better shape. Commodity markets, a key source of earnings for many EM companies, have found a better demand/supply balance – including crude oil after OPEC’s decision last week to cut supply.

We like selected commodity-producers but are wary of manufacturing countries vulnerable to a tougher U.S. stance on trade. We prefer countries where structural reforms show a willingness to sacrifice short-term economic pain for long-term gain, such as India’s move to eliminate high-denomination banknotes. Finally, we prefer hard-currency EM bonds – particularly in high-yielding oil exporters such as Russia, Colombia and Kazakhstan – and short-duration local currency bonds in some countries.

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Date: Event
Dec. 5 U.S. ISM Non-Manufacturing Index
Dec. 7 U.S. JOLTS; China foreign exchange reserves
Dec. 8 ECB monetary policy meeting announcement
Dec. 9 U.S. consumer sentiment; China consumer price index, producer price index

The ECB will be the focus this week as the market looks for clarity on the outlook for its asset purchases. Chinese data will provide more details on whether capital outflows have accelerated and may show further evidence of reflationary trends.

 

  • OPEC members and Russia agreed to cut production, driving oil prices above $50 a barrel and energy stocks higher.
  • Value stocks outperformed and bond yields hit new highs on the reflation theme. The U.S. dollar’s rise paused, helping EM equities.
  • As-expected U.S. jobs growth cemented expectations for a Fed interest rate increase in December.
  • Italy's constitutional referendum was voted down, likely leading to a caretaker government.

Global snapshot

Weekly and 12-month performance of selected assets

 

EquitiesWeekYTD12 MonthsDiv. Yield
U.S. Large Caps -1.0% 7.2% 5.4% 2.1%
U.S. Small Caps -2.4% 17.3% 12.0% 1.3%
Non-U.S. World -0.1% 1.7% -0.7% 3.2%
Non-U.S. Developed -0.2% -2.3% -4.0% 3.4%
Japan 0.2% 2.2% 1.3% 2.1%
Emerging -0.3% 9.7% 6.3% 2.7%
Asia ex-Japan 0.0% 6.7% 4.6% 2.6%

 

BondsWeekYTD12 MonthsYield
U.S. Treasuries 0.0% 1.0% 0.6% 2.4%
U.S. TIPS 0.1% 4.5% 3.6% 2.3%
U.S. Investment Grade 0.1% 5.3% 4.1% 3.4%
U.S. High Yield 0.4% 15.1% 11.8% 6.5%
U.S. Municipals -1.1% -1.2% -0.7% 2.8%
Non-U.S. Developed 0.3% 2.8% 4.0% 0.8%
Emerging Market $ Bonds -0.4% 8.2% 6.8% 6.0%

 

CommoditiesWeekYTD12 MonthsLevel
Brent Crude Oil 15.3% 46.1% 28.2% $54.46
Gold -0.5% 11.0% 11.7% $1,177
Copper -2.0% 22.4% 26.2% $5,760

 

CurrenciesWeekYTD12 MonthsLevel
Euro/USD 0.7% -1.8% 0.5% 1.07
USD/Yen 0.3% -5.6% -7.9% 113.51
Pound/USD 2.0% -13.6% -14.9% 1.27

Source: Bloomberg. As of December 2, 2016. Notes: Weekly data through Friday. Equity and bond performance are measured in total index returns in U.S. dollars. U.S. large caps are represented by the S&P 500 Index; U.S. small caps are represented by the Russell 2000 Index; Non-U.S. world equity by the MSCI ACWI ex U.S.; non-U.S. developed equity by the MSCI EAFE Index; Japan, Emerging and Asia ex-Japan by their respective MSCI Indexes; U.S. Treasuries by the Barclays U.S. Treasury Index; U.S. TIPS by the U.S. Treasury Inflation Notes Total Return Index; U.S. investment grade by the Barclays U.S. Corporate Index; U.S. high yield by the Barclays U.S. Corporate High Yield 2% Issuer Capped Index; U.S. municipals by the Barclays Municipal Bond Index; non-U.S. developed bonds by the Barclays Global Aggregate ex USD; and emerging market $ bonds by the JP Morgan EMBI Global Diversified Index. Brent crude oil prices are in U.S. dollars per barrel, gold prices are in U.S. dollar per troy ounce and copper prices are in U.S. dollar per metric ton. The Euro/USD level is represented by U.S. dollar per euro, USD/JPY by yen per U.S. dollar and Pound/USD by U.S. dollar per pound. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index. Past performance is not indicative of future results.

Asset class views

Views from a U.S. dollar perspective over a three-month horizon

Table: Asset class views from a U.S. dollar perspective

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Richard Turnill
Global Chief Investment Strategist for BlackRock
Richard Turnill is Global Chief Investment Strategist for BlackRock. He was previously Chief Investment Strategist for BlackRock’s Fixed Income and active Equities business and has also led the Global Equity team. Richard started his career at the Bank of England.
Richard Turnill
Global Chief Investment Strategist for BlackRock
Richard Turnill is Global Chief Investment Strategist for BlackRock. He was previously Chief Investment Strategist for BlackRock’s Fixed Income and active Equities business and has also led the Global Equity team. Richard started his career at the Bank of England.

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Isabelle Mateos y Lago

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Kate Moore

Kate Moore

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Jeffrey Rosenberg

Jeffrey Rosenberg

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