Individual Investors

Insights

Q1 2015 Emerging Markets

12/02/2014

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:

  1. Currency depreciation
  2. Fiscal tightening
  3. Moderating Chinese growth
  4. 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….

  1. 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.
  1. 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.
  1. 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.
  1. 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.
  1. Expect much conversation regarding the Brazil economy, as troubled preparations for the Rio 2016 Olympics will be in the global headlines.
  1. 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.
  1. 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.

Past performance is not a guarantee of future results.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.