The growth picture across emerging markets has deteriorated, but a market strategist has told investors there is “no reason to panic”.
Donald Trump’s election as the next president of the US sent jitters through emerging markets, largely due to the protectionist nature of his policies, which are expected to threaten some of the country’s existing overseas trade deals.
But the prospects of more fiscal stimulus and the likelihood the Federal Reserve will hike rates this month has also increased.
Maarten-Jan Bakkum, senior emerging markets strategist at NN Investment Partners, said this could lead to more monetary tightening next year than has been priced in by the markets.
“In such an environment, more capital is likely to move out of emerging markets,” he said.
Emerging markets have been hit by outflows and higher interest rates, and this combined with rising inflation is challenging for emerging debt markets, he said.
In times when money is leaving emerging markets, Mr Bakkum said investors need to look at inflation with “more critical eyes”, particularly as inflation can undermine profits.
Yet he said so far, inflation rises in emerging markets have been modest.
“There is no reason for panic, but if currencies continue to depreciate we should expect inflation to rise more."
I think inflation is something to be mindful of, but investors also need to watch the strength of the dollar Darius McDermottDarius McDermott, managing director of Chelsea Financial Services, agreed there is no reason to panic.
“Broadly speaking, valuations are not super-rich in emerging markets; it’s not stand-out ridiculously cheap, but we are very positive on some nations like India which have strong politics at last and are business-friendly.
“When we talk about inflation in the developed world, the key thing is the oil price, and that part of the inflationary basket is going to rise.
“But some emerging markets are beneficiaries of oil,” he said, pointing out the many emerging markets are exporters of oil.
Mr McDermott said it was "too broad" to warn people to look out for emerging market inflation because emerging markets cover some 20 to 30 countries.
“That’s when we trust good active managers to look at them on a country-by-country basis.
“I think inflation is something to be mindful of, but investors also need to watch the strength of the dollar because historically a strong dollar is bad news for emerging markets.”
