HSBC Global Asset Management has outlined potential areas of strong growth and opportunities to improve returns in volatile emerging market (EM) assets, in its investment outlook for Q2 2014.
The company’s Investment Quarterly sets out how HSBC assesses each EM country individually, rather than the class as a whole.
The EM sell-offs in 2013 and early 2014 created huge volatility as managers exited indiscriminately.
The sell-offs of EM assets have been necessary to reveal a more realistic picture of the economic conditions within the sector, which will likely see further volatility in the short-term but offer attractive long-term fundamentals for savvy investors.
Hervé Lievore, senior macro and investment strategist at HSBC Global Asset Management, says: “The EM space is not homogenous, either in terms of financial performance or economic fundamentals. So when assessing the outlook for EMs, identifying external and internal imbalances is crucial in deciding which countries still have strong growth potential above the wider EM mix.”
The principal factor that has caused volatility over the past 12 months was largely due to external imbalances, Lievore suggests. EM economies were relying on unstable external capital flows due to two key reasons. Firstly, Western countries had to address substantial external deficits following the global financial crisis due to excess domestic demand, which stifled inflows into EM markets. Secondly, as EM currencies appreciated over time from Western investment, competitiveness was gradually eroded.
Lievore adds: “The sell-offs can be seen as a reassessment of risks after a period of relative complacency, a negative side-effect of extremely loose monetary policies. Some EM countries are looking to rebalance external imbalances by raising policy rates, such as in India, Turkey and Brazil, to depress domestic consumption and reduce the strength of their currencies. This approach reduced India’s current account deficit from USD21 billion in Q2 2013 to USD5 billion in Q4.”
