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Why are emerging market equities so strong?

Why are emerging market equities so strong?

While investors are moving back into emerging markets following last year’s outflows, lingering headwinds for growth prospects require investors to be selective.

Jack Allen, assistant economist at Capital Economics, said emerging market equities were on track to outperform their developed market counterparts for the first quarter since 2012. ‘We think that emerging market equities will continue to outperform over the next few years as their relatively attractive valuations continue to entice investors,’ he said.

Allen admitted there were several risks associated with emerging markets, however. He said growth in the majority of those economies was unlikely to return to pre-crisis rates, the tightening of monetary policy could weigh on investors’ appetite for risk and any of the geopolitical crises in emerging countries could escalate.

But he added investors were likely to have factored in the prospect of a slowdown in growth and emerging market assets had done well since tapering began.

The wider impact of the current problems in several emerging countries was likely to remain limited unless they started to have broader implications, he said.

There is also positive sentiment towards emerging markets among intermediaries. According to the Barings Investment Barometer, Barings Asset Management’s survey of 81 professionals, 55% intermediaries believe their clients should increase their exposure to emerging market equities.

Barings said this was a significant rise from 41% in its last survey. The research also revealed some concerns towards the asset class as 58% of intermediaries said they saw slowing growth in China as a major macroeconomic challenge over the next six months and 56% were concerned about the impact of the Ukraine conflict.

Rod Aldridge, head of UK wholesale distribution at Barings, said: ‘Our research shows that interest in emerging markets as an investment opportunity is recovering. The short-term outlook for emerging markets remains challenging, as evidenced by the recent events in Thailand. However, on a long-term basis, we strongly believe that Asian and emerging markets will continue to grow and develop.’

Keith Wade, chief economist and strategist at Schroders, said emerging market equities valuations were compelling and there were growing signs of economic stability, but investors needed to be selective, keeping current account deficits in mind.

‘A number of key economic indicators, such as Purchasing Managers Indices, currently show that the major emerging market economies continue to struggle to match those in the West. In addition, exports are yet to show a clear sign of pick-up,’ he said. ‘Although in the long run we believe emerging markets need to re-orientate themselves towards domestic rather than external demand, exports remain an important source of growth.’

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