Emerging markets can be an afterthought when it comes to portfolio selection, especially in the past year as the U.S. equity market has blasted through new highs and trade tensions have brought worries to countries such as China and South Korea, hurting those markets.
That said, analysts believe 2020 will be a turning point for EM, especially in performance. But that optimism comes with some caution.
The first of three reasons for optimism, Peter Gillespie, managing director at Lazard Asset Management, told ThinkAdvisor, is “we are expecting a temporary truce in the trade war between the [United States] and China,” he said. “That has probably been the biggest overhang in the emerging markets.”
He believes the tension between the two countries will ease and they will work out some kind of so-called “skinny deal,” which would be helpful for emerging markets over the next 12 months or so.
With an ease in trade tensions, “we’re expecting earnings to rebound in emerging markets next year,” especially after being relatively flat in 2019. These returns, he says, could be in the mid-teens.
On a more secular note, “we do think emerging markets are increasingly dominated by more global, more innovative, more entrepreneurial firms,” which bodes well, he says, for a multi-year EM outlook, especially in China and South Korea.
In fact, outside investment in China also should grow in the next year, as limits on foreign ownership of fund management companies are to be removed by April 1, 2020. A Cerulli Associates survey found a 4.2% growth in assets under management in China the first nine months of 2019, bringing it to $1.9 trillion. In addition, a pilot program by its regulator was launched to test the investment advisory business on mutual funds, allowing fees of no more than 5% of client AUM. Although Chinese investors are new to fee-based models, it will help spur the industry beyond the sales-driven model, Cerulli states.
JPMorgan’s 2020 Investment Outlook echoes much of what Gillespie highlighted, stating “the most important issue remains the evolution of trade policy: No further trade shocks should permit EM Asian economies to stabilize, and overall EM inflation and interest to remain low.”