In the press

  Lull in Emerging Markets coming to an End

The stabilization of commodity prices combined with an increase in interest rates by the Federal Reserve could support the recovery of emerging markets over the medium term. Proactive investors make their move now.

Frankfurt am Main, December 7, 2015 – “The emerging economies have been going through a prolonged and noticeable period of weakness. However, there are increasing indications that the low point has been reached, and things seem set to improve”, explains Cornel Bruhin, fund manager of the MainFirst Emerging Markets Corporate Bond Fund Balanced and the MainFirst Emerging Markets Credit Opportunities Fund. “Bold investors reposition themselves now.” The main reason for the drop in share prices is the collapse in commodity prices to a multi-year low as a result of speculative investments. “Stocks and bonds in emerging economies have suffered from serious outflows over the past two years. The position of investors decreased to 2001/2002 levels”, says Bruhin.

“I’m expecting an improvement in commodities. Following the second low in August, we may now be in the second phase of stabilisation, judging by the charts. This is what the price of oil indicates”, observes Bruhin. Some oil producers have found it difficult to survive the present prices of around 40 US dollars per barrel for West Texas Intermediate crude oil, including American fracking specialists and Canadian oil sands producers. A drop in supply could lessen the pricing pressure. Additionally, there are growing signs that the world’s largest oil producer, Saudi Arabia, is working in this direction, in order to secure an income capable of sustaining the lavish lifestyle of its population. “There are rumours of a decoupling of the Saudi Riyal from the US dollar, in the event of oil prices not recovering from current lows over the medium term”, says Bruhin. “Though the outcomes of last Friday’s OPEC conference have briefly raised the spectre of a bear market, I still expect the process of stabilization in the oil price to continue. Trading anti-cyclically today may therefore be worth it over the medium term.”

This also applies to the emerging economies: “The expectations of market participants with respect to emerging markets have become so negative that even this change towards neutral expectations constitutes a major improvement and should cause prices to rise”, says Bruhin. The reversion to a positive attitude is only just beginning, “but it is going in the right direction.” Even minor investment could quickly result in an optimistic market and a strong performance. “Experts are beginning to discern the end of the bear market for assets in emerging economies and are predicting higher rates of growth for 2016. Should this turn out to be the case, attractive returns can be expected. Very few investors have positioned themselves so far – the first and the most prominent of these is the contrarian value investor GMO in the USA”, notes Bruhin.

In addition to commodity prices, the decision of the US Federal Reserve (the Fed) on interest rates also plays a role in investor attitudes. “Estimates made by analysts and investors about when the Fed is going to increase interest rates, and how big the increases are going to be vary greatly. In our opinion, many expectations of increases in interest rates are already negatively priced into the market. If Janet Yellen then goes on to increase interest rates, the markets should quieten down”, expects Bruhin, fund manager. Raising the base interest rate could dampen both the soaring value of the US dollar and the flow of capital into developed markets, and cause emerging markets to come into focus. The strong US dollar has been putting local currencies in emerging economies under sustained pressure and slowed investment. “We mustn’t forget that growth figures in China are still very good. In many emerging economies, the potential is still higher than it is in developed economies, even if the extreme growth rates of the years following 2008 are not going to be reached again”, explains Bruhin. “And money flows to where the growth is. Investments in emerging markets are therefore going to rise again, sooner or later. We ourselves are already investing in high-yield bonds again.”

Experts see the high foreign-exchange reserves of many emerging economies as well as the demographic factor as presenting opportunities over the medium to the long term: “The current allocation in emerging markets is too low, relative to the significance of these states over the coming ten to 15 years.” The fund management team of the MainFirst Emerging Markets Corporate Bond Fund Balanced and of the MainFirst Emerging Markets Credit Opportunities Fund sees bonds in Brazil, Mexico and Indonesia as showing promise.

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