Whether the situation in emerging markets will improve in 2016 depends on three factors — monetary policy in developed countries, China’s macro economy and commodity prices.
In addition, issues such as the terror attacks in Paris and the downing of a Russian fighter jet by Turkey reflect increased geopolitical risks.
The Federal Reserve’s tightening policy has made the global financing environment particularly challenging.
And with the Fed moving more slowly than expected toward an anticipated interest rate hike, investors could be caught off guard when the liftoff happens.
Even if the European Central Bank widens its loose monetary policy, it can’t cushion the shock of a US rate hike.
China will continue to stimulate its economy with monetary and fiscal measures after a 30 percent year on year increase in spending from August to October and five interest rate cuts this year.
A hard landing for the Chinese economy is a major risk with very low possibility.
Another risk factor is the renminbi’s competitive depreciation.
Although the process may be gradual, the competing trends in the economy and monetary policy between China and the US could lead to a 10 percent devaluation of the yuan.
That will trigger a chain reaction in Asian economies and among major commodity exporters.
We recently suggested that investors should hedge the potential impact of a big renminbi devaluation.
Overall profit growth in the market should be 5 to 10 percent.
But economic restructuring will differentiate winners and losers.
Investors should focus on companies that have high growth potential and are geared to the service industry or the new economy, as well as related sectors such as information technology, non-essential consumer goods, healthcare and insurance.
Real estate, automobile and some state sectors will benefit from policy reform.
We like companies that have wider overseas exposure, untethered from the old economy.
In the next 12 months, the equity landscape will change.
The inclusion of 14 Chinese companies, mostly internet counters, in the MSCI China Index will transform the index closer to the status of a developed economy benchmark.
The Standard & Poor’s 500 Index has a 48.6 percent weighting for new economy stocks.
The change for Chinese stocks will support a positive view on the Chinese equity market.
Meanwhile, falling commodity prices will affect raw material exports.
However, overall commodity prices should remain generally stable, apart from a moderate increase in oil prices.
Major commodity exporters such as Brazil and South Africa are expected to undertake structural reform in 2016.
The situation is unlikely to worsen; in fact, there are signs of recovery in some regions.
A neutral position on emerging economy stocks is reasonable.
Investors are expected to be prudent and conservative toward emerging markets and might consider reducing their weighting in their portfolios.
Defensive plays look promising. We would give China and Poland a buy rating and underweight Malaysia, Mexico and Thailand.
This article appeared in the Hong Kong Economic Journal on Dec. 2.
Translation by Myssie You
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