Partner Article

Emerging Markets fundamentals will remain strong in 2013

ACPI Investment Managers, an independent, innovative provider of asset management solutions for institutional and individual investors, is predicting that the fundamentals of Emerging Markets (EM) look set to remain particularly strong, presenting good investment opportunities in 2013. With growth in these markets determined domestically, they don’t rely too heavily on the economics of the West for either revenues or funding.

Alia Yousuf, Portfolio Manager, Head of Emerging Markets at ACPI says:

“This year we favour local currency bonds, which we think will perform more in line with local growth and inflation dynamics. Inflation indicators are pointing firmly down in most major EM countries while they are increasingly able to finance their current account deficit with hard currency bonds issuance.

With Developed Markets (DM) central banks continuing their balance sheet expansion (Quantitative Easing (QE), Long Term Refinancing Operation (LTRO) and Outright Monetary Transaction (OMT) etc.), Emerging Markets local currency risk is becoming less of a concern. Hefty capital inflows are likely to generate appreciation pressure on currencies. Until the growth cycle has fully stabilised, markets are likely to find central banks competing to create liquidity and ward off appreciation pressure. This will further fuel local bonds.“

The firm also outlines its areas to watch over the course of 2013:

Yousuf continues:

Latin America

“We see Latin America set to grow slightly faster in 2013, driven in part by Brazil’s pro-growth programme and Mexico’s implementation of new reforms to foster economic development. Near or above potential GDP growth will be supportive of Latin American FX in 2013, but intervention could prevent significant appreciation. This is especially the case in Brazil, where the country’s Central Bank will look to reduce the volatility of Brazilian real, intervening if the pace of FX appreciation is deemed excessive, effectively keeping the currency weaker against the US dollar.

Eastern Europe

Growth in this region will be lower than in 2012 as lower euro area growth needs to be incorporated. We think most central bank easing has occurred, with the exception of Poland and Hungary. Although this is not our base-case scenario, headline risk will remain high.

Africa/Middle East

Mid-year presidential elections in Iran will add some uncertainty to the outlook of these regions because of possible popular protests. In South Africa, risks of large-scale strikes and further social unrest remain elevated in 2013, with one more ratings downgrade expected.

Asia

Asian growth held up well in 2012 despite the slowdown in China, currency appreciation, and decline in exports. This is attributed to fiscal and monetary accommodation given moderating inflation. The differentiation within Asia was the degree of fiscal stimulus and the size of the domestic market. We expect this pattern to continue in 2013 and we see growth resilience in Thailand, Indonesia, the Philippines and Malaysia. However, Korean won and Singapore dollar outperformance in 2012 could be pared back in 2013 as growth and inflation wane.“

India in particular is tipped to be a country with strong investment opportunities in 2013:

Steven O’Hanlon, Chief Investment Officer, Fixed Income at ACPI says:

“We expect the Reserve Bank of India (RBI) to deliver a 50 bps cut by April 2013, and therefore continue to recommend investments in government bonds with long duration to benefit from this. We expect the Indian 10-year government bond to initially move towards a fair value range of 7.65% – 7.80% by the first quarter of 2013.

In terms of inflation, the headline Wholesale Price Index (WPI) trajectory appears to be heading in the right direction, below the 7% mark, despite the higher readings expected in December and January. This should therefore allow the RBI to cut rates and still maintain a positive real repo rate (nominal rate minus inflation) of at least 50 bps. Given the RBI’s rhetoric on managing inflation expectations and barring any further growth shocks, we believe it would ensure that the ‘real repo’ rate remains positive for the majority of this year.

In 2013 we also expect some improvement in India’s export numbers compared to the last 12 months, as the lagged benefit of rupee depreciation finally kicks in. In fact, export orders appear to have picked up in the last three months. We still believe that the deterioration in the Current Account Deficit (CAD) is cyclical and if oil and gold prices fall by 10-20%, the current account deficit can fall quite sharply, easing funding concerns and leading to rupee appreciation as capital flows are expected to remain strong.“

This was posted in Bdaily's Members' News section by ACPI Investment Managers .