Q1 2015 Emerging Markets
Year to date, the MSCI Emerging Markets Index is down nearly 2% despite very strong, +35%, performance from India. Russia, South Korea, Colombia, Brazil, and Mexico were the culprits for the year’s relative underperformance.
In 2014, these four well-known emerging market headwinds motivated investors to seek investments in developed economies instead:
- Currency depreciation
- Fiscal tightening
- Moderating Chinese growth
- FOMC 2015 policy expectations
For 2015, I expect some of these conditions to improve modestly and others to evolve in a positive capacity. The year will not begin, nor should it, with emerging markets as a broad asset class favored over U.S.-centric investments. However, lower energy and food prices will lead to select fiscal improvements for some emerging market economies.
Overall, my expectations for emerging market assets in 2015 are for a modest improvement from the low expectations I maintained heading into the second half of 2013 and throughout 2014.
Please consider the following….
- Russia and Brazil will continue to endure significant headwinds from the sharp decline in oil prices. If oil finds a bottom in 2015, I expect Brazil to be favored over Russia. If oil prices are sustained below $75, Russia may present the world’s largest 2015 geopolitical risk.
- China GDP contracted in 2014 to 7.3% from 7.7% in 2013. Unless 2015 GDP tracks back toward 7.7% (consensus view is actually 7%), limit allocations to assets aligned to accelerating Chinese growth.
- India GDP was 9.3% in 2010; it fell to 4.7% in 2013. Currently, the most favored emerging market economy is India, and rightfully so, as 2014 GDP snapped back sharply to 5.3%. Continue to favor India, as lower commodity import costs will contribute to GDP expanding even further in 2015 toward 6%. Consideration to all – debt, currency and equity markets – should be given.
- If the U.S. economy is able to gain further momentum, I expect a nice recovery from Taiwan, Mexico, and Korean equity markets, as those economies are highly tethered to U.S. growth and underperformed in 2014.
- Expect much conversation regarding the Brazil economy, as troubled preparations for the Rio 2016 Olympics will be in the global headlines.
- In 2015, the worst possible condition emanating from the U.S. for the broad emerging market asset class would be a far more aggressive FOMC.
- In 2015, the best possible U.S.-driven condition for the broad emerging market asset class would be a sharp reversal lower for the U.S. dollar.