Conference Presentation, Panel
Investing in Emerging Markets: Out of the Rabbit Hole?
- Emerging market asset price drivers are expected to shift increasingly toward domestic policy, politics, and capital flows on a country-specific basis, with private investing driven by local factors rather than export views over the coming 10 to 15 years.
- Market assumptions may have overestimated the materialization of positive U.S. policy and smoothed implementation, while a 18% allocation of global infrastructure spending to emerging market power over the next 15 years creates a significant investment trend.
- Structural themes including over 75% of global GDP growth, 93% of future urbanization, and the rise of the middle-income class are projected to unfold over the next 15 years, requiring long investment horizons to bridge liquidity mismatches, particularly in UK and European markets.
- Interest rates are forecast to remain in a somewhat higher range due to developed economy debt accumulation, though never returning to the levels seen in the 70s, 80s, or early 90s, while a widening growth differential between emerging and developed markets is viewed as a precursor to asset performance.
- Specific country outlooks include Egypt performing well in 2017 with macro reforms and expected rule of law improvements over three to five years; Russia benefiting from stabilized oil prices and U.S. power shifts; Indonesia offering domestic debt opportunities despite illiquidity; and Vietnam cited as a favorable contrarian play due to local currency payments tied to U.S. dollar construction costs.
- India is expected to experience a growth dip in the immediate term due to demonetization, with recovery predicted to "seven plus percent in 2018 and beyond" if the government controls new note circulation, while Argentina is identified as having huge upside due to under-investment and a strong policy team.
- China is viewed with ambivalence regarding politically motivated market surprises, contrasting with a prediction that the emerging market private equity industry remains young, fragmented, and lacking a sophisticated mid-tier sector.
- Risks include the potential for political surprises in emerging markets, difficulty in market timing due to equity volatility, and the challenge of "pushing the elephant through a keyhole" if rising interest rates or credit concerns impact large corporate bond volumes with poor research coverage.
- Volatility management strategies suggest focusing on non-cyclical businesses in frontier markets with low correlation between countries like Nigeria, Pakistan, Vietnam, and Argentina to achieve resilience, while investors generally compensate for unmanageable global events by purchasing assets at cheaper prices rather than aggressive foreign exchange management.
- A long-term improvement in rule of law and the development of a domestic investor base are expected to enhance market health and provide frameworks for capital repatriation, though global events beyond government control still necessitate careful risk assessment.