The synchronisation element is a key for market participants to explore new venues for investment returns in 2018. According to a report published recently by the International Monetary Fund (IMF), the world’s economy experienced a kick-start in global activity in 2016, which then was also sustained in the first half of 2017.
The gathered momentum was primarily brought about by the firmer domestic demand, mainly triggered by the overflow of money by the ECB, in addition to China, which also registered a pick-up in domestic demand. Thus, it is interesting to see how this pick-up in global growth will affect certain geographical areas.
Interestingly enough, the fostered optimism in global growth is also having positive expectations for growth in Emerging Markets (EM) and by an extension to Frontier Markets. Such perception might come as a surprise to many market participants when considering the fact that credit markets experienced tight valuations as investors prolonged their search for yield.
The said optimism comes after a difficult period for EM in terms of GDP growth coupled with volatile currency movements, but predominantly by the fall in oil and other commodity prices. In fact, the last few years showed a narrowing growth gap between EM vs Developed Markets (DM), as DM growth picked up while EM growth headed down.
The recent slower growth in EM over the past months and its sustainability in terms of high single digit numbers was debated ad nauseam over the past years. Rightly so, market participants were questioning for instance, whether the 7% annual GDP growth in China is sustainable, or whether Brazil will re-emerge from a recession following the huge corruption scandals, which amongst others negatively impacted its growth. Clearly, these are big dilemmas in which some investors might have reappraised their investment thesis.
On the contrary, 2017 is expected to mark the first year of higher EM growth according to IMF figures after six-years of EM growth slowdown. The interesting bit is the outlook in terms of global growth for 2018, following the mild headwinds experienced in 2017. The recovery on a global front is undoubtedly a positive for EM.
From the developed world, Bloomberg consensus shows US real GDP growth will lead the way in 2018 with an annualised rate of 2.5%, slightly higher than the 2.3% in 2017 - this is in line with the latest Federal Reserve forecast. While in the euro area, GDP will be slightly weaker to circa 2%.
Given the good growth prospects for developed economies, EM should experience the spill over affect given their historical correlation of circa 60%.
Naturally, the good outlook for developed economies given a pick-up in domestic demand creates a ripple positive affect in terms of demand from EM, primarily from the commodity front. In my view, excluding any unforeseen circumstances, the worst for commodities might be over. While currencies, despite still being vulnerable to a strengthening dollar the major adjustments has occurred. In addition, big countries within the EM region, which experienced recession phases in 2015-2016, such as Brazil and Russia, are now enjoying growth.
As I have opined in previous writing, the EM world is still a good venue in generating attractive returns. Obviously being selective is imperative in capturing those niche markets, which might be offering abnormal returns given possible mis-pricings. What is definite is that the positive outlook for the world’s economy in 2018 will be up-streamed to EM regions. Thus, given the positively inclined vibe, an allocation in EM will be a good venue to beef up returns.
Disclaimer:
This article was issued by Jordan Portelli, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.