Emerging markets will “continue to struggle” in spite of their underperformance so far this year, ING Investment Management’s Maarte-Jan Bakkum has said.
Mr Bakkum, senior emerging market equity strategist at the group, said emerging market equities had underperformed developed equities by 12 per cent since the beginning of the year. This is due to a “deteriorating relative growth picture” compared with the US and Japan, concerns about China’s growth trajectory, and the weakening of the Japanese yen, which has put pressure on Asian currencies and growth.
The strategist said the company was staying away from specific emerging markets because of various macroeconomic pressures.
“First of all, these are the markets that are most sensitive to the Chinese slowdown such as Brazil, which is a main commodity exporter,” he said.
“Secondly, it is those markets in Asia that feel most pressure from the weakening yen. While Korea is the obvious one, downward pressure remains on all east Asian currencies as governments throughout the region want to avoid relative currency strength.
“And thirdly, they are the markets with the highest external financing requirements and where the direction is still towards increasing macro imbalances – South Africa and Indonesia fall into this group.”
The strategist added that emerging markets had an “increased reliance” on domestic demand for new credit and foreign portfolio investment.
“For now, global liquidity growth remains supportive for the countries with the highest external financing needs, but this is likely to change once the Fed starts reducing its quantitative easing,” Mr Bakkum added.
However, Mr Bakkum said Mexico, India and Turkey were among the countries the company felt “comfortable” holding an overweight exposure to.
