Art by Valeria Petrone
Emerging markets investors say there are opportunities for long-term asset owners in countries such as Colombia, India and South Africa, among others, and parts of Europe for long-term asset owners.
Investors believe countries ripe for investment include those that have faced economic instability, driving down the cost of investment, but are now leading local reform efforts. This makes them less likely to be disrupted by geopolitical risks such as market shifts caused by U.S. election results and wars in Ukraine and the Middle East, sources say.
Colombia Set to Rebound
One prime example, according to Ed Al-Hussainy, a senior rates analyst and head of emerging market fixed-income research at Columbia Threadneedle Investments, is Colombia, where he foresees fixed-income opportunities.
“The story in Colombia is that it used to be an investment-grade borrower several years ago,” Al-Hussainy explains. “They fell from grace. They borrowed too much and spent it unwisely. But in the past few years, the government has been making an effort to raise the tax revenue and lower their spending. They have been successful at reducing their risk. ”
He notes that the opportunity is in Colombia sovereign debt denominated in U.S. dollars (not local currency). “It’s the government in Colombia doing something—and it’s not dependent on the U.S. election,” Al-Hussainy says. “When things go from horrific to bad, we want to catch that turn.”
The investment team at Matthews Asia noted in August that Latin America offered long-term emerging markets opportunities for equities investors.
While the firm was “cautious in the short term” and expected volatility in the market leading up to the U.S. presidential election, its investment team expected “Latin America’s strength in natural resources, its structural attributes and digital innovation to be significant traits that will create investment opportunities,” according to a blog post co-authored by Matthews Asia CIO Sean Taylor and Portfolio Manager Jeremy Sutch.
“Latin America’s markets are cheap compared with other regions and global monetary easing may provide a macro boost that feeds through to improvements in equity performance,” Taylor and Sutch wrote.
In the longer term, “a number of Latin American economies, including Brazil, Mexico, Colombia, Chile and Peru, have robust domestic consumption and structural growth attributes, including proximity to the U.S., diverse global trade links and strong foreign direct investment,” the post stated.
Kirstie Spence, a fixed-income portfolio manager at Capital Group, wrote in a recent report that many Latin American currencies are “sensitive to emerging markets risk appetite” and could therefore struggle in the short term due to tariffs levied by the administration of President-elect Donald Trump and anti-immigration measures. But these currencies “could benefit longer term if tariff policy is focused on China,” easing local trade concerns, Spence wrote.
Relative Improvement Matters
Another emerging market opportunity comes as a surprise and an exception to the rule: Al-Hussainy says asset owners should not overlook sovereign debt investing opportunities in Ukraine, despite the country’s ongoing war with Russia.
“They’ve gone through a bond restructuring process,” Al-Hussainy says of Ukraine. “And the debt burden on the government has declined compared to last year,” he adds, noting that distressed debt opportunities would be attractive, as there is an “opportunity for bonds to reprice higher.”
In September, Ukraine concluded the restructuring of more than $20 billion of international debt to improve its macroeconomic stability, even amid its war with Russia.
“Countries in emerging markets are typically driven by their domestic stories and are generally poorer in credit quality,” Al-Hussainy says. “More specifically, we like Colombia, Senegal, Ivory Coast, Turkey, Pakistan and Ukraine. The through line for much of these (markets) is that they are low-quality in terms of their credit rating.”
Local reform is also happening in these markets, and Columbia Threadneedle likes that these developments are “divorced from the U.S. election” and other major geopolitical factors, he explains.
“The problem we had going into the [U.S.] election was everything was quite expensive,” Al-Hussainy says. “Emerging market assets have done really well for the past year and a half, because there was a lot of cheap stuff to buy, as far as emerging markets credit. That job became somewhat harder after the election, because assets have rallied again. ”
Targets in Wake of U.S. Election
Given the outcome of the U.S. presidential election, Vivek Tanneeru, a portfolio manager for emerging markets equities strategies at Matthews Asia, expects India will be among the markets least impacted by policy shifts from Trump’s administration , which, based on early foreign policy appointments, appear to be focused on China and trade, among other issues.
India is “ largely a domestic consumption-driven market,” Tanneeru explains, noting that Trump’s agenda for a second term is expected to include a reduced trade deficit—and the use of tariffs with foreign trade partners as leverage.
In addition to India, he is optimistic about “countries where self-help is going on in the form of structural reform.”
“South Africa is a prime example of that,” Tanneeru says. “South Africa has had really bad mismanagement problems around power outages or blackouts and in the transportation and logistics sectors. Those issues have been addressed over the last two years. In the transportation sector, they are working on addressing challenges in the rail network. Those kinds of efforts are going to pick up pace under the new coalition government.”
“Evaluations are cheap, though not as cheap as before the [late May South African] election,” Tanneeru continues. “It’s not gangbusters growth like you’ve seen with some of the emerging markets, but it’s a good change.”
He also notes that there should be foreign direct investment opportunities in South Africa for U.S. asset owners, as the country appears open to market participation through investments in its power transmission efforts, as well as railway and marine transportation.
“The idea there is to anchor this private participation so the power transmission (sector) can be built out,” Tanneeru adds.
Al-Hussainy, of Columbia Threadneedle, says that, overall, emerging markets investors should be watchful of the U.S. election’s impact on the dollar.
“In the aftermath of the election here, the dollar has strengthened quite meaningfully. It just hit a two-year high today,” Al-Hussainy said in a November 12 phone interview. “You can imagine if this persists into the middle of next year. A strong dollar is painful for emerging markets. Are Trump-administration policies going to strengthen or weaken the dollar? Right now, a lot of the things that are being talked about will strengthen the dollar. If you’re an institutional investor, watch what happens with the U.S. dollar: If the dollar strength persists, that could cause a lot of pain for emerging markets investors next year.”
Tags: Capital Group, Colombia, Columbia Threadneedle Investments, Ed Al-Hussainy, Emerging Markets, India, Jeremy Sutch, Kirstie Spence, Matthews Asia, Sean Taylor, South Africa, Turkey, Ukraine, Vivek Tanneeru