Emerging markets continue to look favorable in 2018, according to experts and market outlooks.
Looking at emerging economies, LPL Financial expects growth near 4.8% in 2018, as “advantageous demographics, stable commodity prices, and early cycle acceleration help offset slowing but stable growth in China.”
According to LPL, the stories to watch next year are India’s role as “the new China,” given its size and growth potential, and possible rebounds in Latin American economies.
LPL says that the return of the business cycle will be most evident from the lenses of China and the U.S. dollar.
“Despite the slowdown in the pace of output growth in China, emerging economies have held up well, showing resilience and flexibility in economic performance,” according to LPL.
State Street Global Advisors expects similar outcomes in emerging markets next year.
According to SSGA’s 2018 Market Outlook, EM growth will likely quicken to a five-year high, assuming “China focuses on reining in debt gradually and Brazilian politics do not derail either the tentative progress on structural reforms or the budding cyclical recovery.”
According to SSGA, four fundamental factors should sustain EM growth over the next year: a pickup in global trade, higher commodity prices, a weaker U.S. dollar and monetary policy shifting to a pro-growth agenda.
Looking longer term, SSGA says emerging markets still have a “demographic advantage, considerable room for catch-up growth, and, relatively speaking, greater potential for policy stimulus.”
According to SSGA’s 2018 Market Outlook, more than 40% of investors indicate a preference for increasing their allocations to both the emerging and developed ex U.S. markets, selecting Europe over Japan in terms of regional ex U.S. preferences.
Emerging market debt also has some attractive qualities going into the new year.
SSGA finds that 26% of investors are set to raise their emerging market debt allocation. “This bond segment may become the replacement for investors’ income allocation,” according to SSGA’s market outlook.
Alexander Dryden writes in JP Morgan Asset Management’s 2018 outlook that “with the global economic backdrop looking robust, areas such as emerging market debt look particularly attractive.”
In the U.S., according to Dryden, sectors with atypical responses to rising interest rates — like high-yield and emerging market debt — could play a part in helping to lift returns.
“With the help of areas such as high yield and emerging market debt, returns from fixed income holdings are likely to be positive, just lower than history,” he writes.
LPL agrees that continued global expansion — along with still accommodative global monetary policy — should provide support for emerging market debt. However, LPL warns that European Central Bank tapering could create a headwind there.
“Historically, less accommodative policy has coincided with slowdowns in emerging markets growth rates due to higher borrowing costs,” according to LPL.
This is why LPL prefers dollar-denominated EM debt, as local currency EM debt is more volatile due to the currency fluctuation for U.S.-based investors.