Emerging markets are increasingly finding favour with investors after bouncing back last month from a period of underperformance.
Emerging market equities fell sharply this year and have lost 12 per cent in 2018 so far, but November saw the asset class emerge as the best performer in the month, according to data from FE Analytics.
The broader MSCI Emerging Markets index returned 1.6 per cent, roughly four times the return of the MSCI All Country World Index in the period.
The bounce back was partly a result of hints from US policy makers that the pace of interest rate rises would moderate, which could lead to an easing of the strength of the dollar, in turn making the borrowing costs for emerging market entities less onerous and boosting returns for investors.
Chris Godding, chief investment officer at Tilney, said the recent bout of market volatility meant equity markets were generally better value, with emerging market and UK shares offering the best value.
Mr Godding said: "The short-term indicators for US growth in early 2019 are pointing to a slowdown related to the impact of higher interest rates and an inventory accumulation caused by the trade tariffs. This slowdown will cause the Federal Reserve to either pause or adjust its hawkish tone and the US dollar will weaken.
"A weaker dollar would be a shock to the consensus and a material positive for the emerging markets where dollar liquidity is important."
He said China, which was nervous about the impact of slower growth and solvency in the shadow banking sector, had started to implement measures to inject momentum into its economy, which will benefit firms exporting to China.
He said: "The state has begun to ease financial conditions via a lower reserve requirement for the banks, lower taxes and a depreciated currency to inject some momentum back into the economy. The benefits of these policy shifts will gather momentum over the coming months and be felt both across the region and by key exporters to China."
But Mr Godding said Tilney has been selling US shares, as he feels a slowdown in the pace of growth will start in 2019.
David Lafferty, chief market strategist at Natixis said he expects US GDP growth to slow down next year, and so for US interest rates to rise only once, if that happens, then the dollar will weaken and emerging markets will be strong performers.
Simon Edelsten, who runs the £195m Mid Wynd investment trust, also agreed with the premise that emerging markets may perform better in 2019 and said he is considering to go less underweight
He said: "Emerging markets pressure is off if US rates are close to neutral and some will enjoy lower oil prices while others won’t.
"We may go less underweight in emerging markets. But it's small beer compared with developed market growth at the right price and we have found that in Europe, the US and even the UK."
Edward Park, deputy chief investment officer at Brooks Macdonald, said he expects the trade dispute between the US and China to moderate, and for this to boost emerging markets.
david.thorpe@ft.com
