Panel
Investing in Emerging Markets: The Returns Are in the Details
Milken InstituteBridget Posh, Bob Diamond, Ana Maria Caresquilla, Jingdong Huang, Penny Foley, Victor Chiu
- Nigeria's population is projected to surpass Brazil's to become the world's fifth most populous nation within the next five to ten years, with annual births in Nigeria expected to exceed the total number of children born in Western Europe this year.
- The Pacific Alliance nations (Mexico, Colombia, Peru, and Chile) are anticipated to become compelling investment destinations in the coming couple of years, driven by robust institutional frameworks and superior growth prospects.
- Emerging markets are forecast to contribute approximately 70% of global growth in 2015, with EM credit potentially benefiting if US Federal Reserve actions are supported by improved growth in developed economies.
- US dollar strength is expected to peak during the initial phase of Fed normalization, creating local currency opportunities for dollar-based investors later this year or early next year, while only the weakest emerging markets face significant risk from US rate hikes due to asymmetric monetary policy and limited FX pass-through.
- The corporate default rate in emerging markets is anticipated to reach roughly 5.5% this year, rising to a baseline of about 3.5% if Venezuela is excluded, which represents a slight increase from the previous year's level.
- China's long-term anti-corruption campaign is viewed as beneficial for investor risk profiles, with leadership anticipating the initiative will persist, while the current equity rally is characterized as intermediate between a one-off event and a sustainable trend.
- Indicators of a retail mania in China, such as participation by taxi drivers and domestic helpers, are interpreted as signals to exit the equity market, even as China plans to export technical expertise, capital, and financial techniques to Africa as part of a "win-win" strategy.
- African T-bill rates are expected to normalize away from current levels of 12-14% provided investment confidence continues, and there is a identified need to establish lending platforms for small businesses to address a significant market void.
- Investor perception of Africa lags the reality on the ground by five to ten years, with returns for correctly priced risk in specific countries historically more positive than public narratives suggest.
- Sub-Saharan African countries are expected to grow as a component of the fixed income opportunity set, though the development of local currency debt capital markets is viewed as a medium to long-term goal that requires time.
- Nigeria presents significant infrastructure opportunities, exemplified by a severe shortage of medical equipment like MRI machines relative to its 80 million population.
- The MILA integration project among Pacific Alliance countries is currently underway but has not yet achieved perfect functionality, and there is uncertainty regarding a potential Venezuelan default due to a lack of disclosed government data.
- The internationalization of the renminbi is expected to proceed gradually, and while long-term optimism exists for the Chinese bond market, the development of a credit culture is predicted to take a significant amount of time.