Analysts have conflicting views about the emerging market’s (EM) growth outlook despite the fact that this sector has continued to grow faster than developed markets and produced higher returns this year.
According to a UBS report, compared to developed markets 2.25 percent, the gross domestic product growth is around 4.5 percent year on year for EM and the sector is holding at its best level since the first quarter of 2015. But concerns about whether or not EM growth can be maintained have also been raised in this report.
“The question now is whether the strong growth impulse in DM (Developing Markets) can sustain, and further, can it boost broader EM growth at a time when China is likely to slow gradually. Alternatively, can EM excluding China growth find support in its domestic demand, and sustain the complex,” said UBS strategists Bhanu Baweja, Manik Narain and economist Arend Kapteyn in a report published on Wednesday.
There needs to be a pick-up in the credit cycle and investment for greater EM growth, which has so far been driven by trade, they argue.
“Thus far trends in EM capacity utilization, industrial production, capital goods imports and the credit impulse don’t inspire confidence that such acceleration is at hand.”
Stating that EM valuations remain attractive which provides support for the asset class, a more positive view for the sector was expressed by Nick Price team leader of Fidelity’s global emerging markets equity team in contrast.
“The outperformance in 2017 thus far has come from a very low level after several years of derating,” he said in a research note published in August.
“At this stage I see growth in the emerging world as robust, particularly amongst EM manufacturers where GDP growth sits at a premium to the developed world and a recent acceleration can be evidenced.”
EM has proven profitable for investors so far this year despite these contrasting views.
Returns of 14.55 percent year to date in 2017 and 2.47 percent in August have been achieved by hedge funds focused on the region. According to a performance report from eVestment published Monday, in comparison, returns of 0.41 percent on the month and 5.39 percent year to date was achieved by hedge funds operating primarily on developed markets.
“Emerging market strategies again produced returns more than double that of developed market strategies in August, resulting in YTD (Year to date) returns that are nearly three times that of their developed market-focused peers,” the report said.
According to Price, solid fundamentals and good results has bene seen in the backdrop to EM.
“I always felt that emerging markets were capable of doing at least as well as developed markets as we headed into 2017, however, the extent to which we’ve seen outperformance is likely reflective of improving EM profitability after years of decline and cheap relative valuations,” he said.
(Adapted from CNBC)