For EM, caution is the name of the game

Thought of the day

by Chief Investment Office 28 Jun 2018

President Donald Trump’s retreat from harsher investment restrictions on China offered a ray of hope for emerging market (EM) investors on Thursday. That’s as trade tensions have made Chinese stocks – our most preferred equity market within EM – cheaper, even as consensus EPS estimates for both China and broader EM equities have held near 15% and 14%, respectively.

But while we share this optimism for EM assets over the longer term, we see a number of reasons for a more cautious approach right now:

  • While EM valuations have dropped near 11x 12m forward P/E, this is really just in line with their 10-year average. Consensus earnings growth figure look optimistic, given a surplus of headwinds.
  • Deteriorating domestic conditions in some EM markets, like Argentina and Turkey, have hit currencies particularly hard. On the other side of the trade, USD strength has continued to surprise, though we expect this will soon run its course.
  • The risk case of more severe trade protectionism cannot be ruled out. New China-US tariffs are slated for 6 July, which could trigger another damaging round of retaliation. Even if both sides reach a settlement, just the fear of a war may already be impacting sentiment and corporate investment.

So while we do not recommend abandoning EM markets altogether, we do think a cloudier short-term outlook necessitates a more vigilant position. We now take a neutral stance on EM equities within our global portfolios. We remain upbeat on global economic growth overall, and on the prospects of a negotiated end to trade tensions with the US.

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