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Past performance is no guarantee of future results.
We see three key drivers underpinning growth across emerging markets in 2018.
Source: Pictet Asset Management, January 2018.
What trends will be at play?
First, we should continue to see growth accelerate for commodity exporters, with real GDP growth reaching 3.0 per cent in 2018 vs. 2.1 per cent in 2017. Meanwhile, EM manufacturers should see lower growth, as China’s growth rate cools.
Source: Pictet Asset Management, CEIC, Datastream, December 2017
The second and most noticeable trend will be the recovery in Latin America, where we expect to see the strongest bounce (see Fig.2. above).
Brazil, its largest economy, should see the biggest rebound in growth (from 0.6 per cent in 2017 to 2.6 per cent), as it emerges from a severe recession. Meanwhile Peru, Chile, Colombia, Mexico and Argentina should all record higher real GDP growth.
Growth momentum appears less strong in EMEA. Real growth is expected to drop to 2.9 per cent in 2018, from 3.4 per cent in 2017, with Turkey the laggard.
Asia ex-Japan’s prospects are somewhere in between. India’s growth should rise from 6.3 per cent to 7.5 per cent, but inflation is also rising (see next section). Other markets in the region however are likely to see flat or slowing growth profiles. In particular, China’s growth is seen slowing from 6.8 per cent to 6.6 per cent.
Source: Pictet Asset Management, CEIC, Datastream, December 2017
At the country level, India is where we expect inflation to rise the most (from 3.5 per cent to 5.3 per cent). This somewhat tempers our optimism around the country's real growth prospects (Fig.2).
On the other hand, Argentina is where we see the strongest drop in inflation, admittedly from very high levels of 24 per cent in 2017 to 18 per cent in 2018.
Source: Pictet Asset Management, CEIC, Datastream, December 2017. * 2017 data are estimates. ** 2018 data are forecasts.
Source: Pictet Asset Management, CEIC, Datastream, December 2017. * 2017 data are estimates. ** 2018 data are forecasts.
Source: Pictet Asset Management, CEIC, Datastream, December 2017. * 2017 data are estimates. ** 2018 data are forecasts.
Value stocks have lagged growth stocks in emerging markets for the past five years, but this might be about to reverse.
History shows that EM value stocks tend to outperform when EM real growth exceeds that of the developed world. This is shown in Fig.7. below, where the differential in performance between value and growth stocks (grey line) closely follows the real growth rates differential between the emerging and the developed world (green line). However the recovery in the green GDP line last year has not yet been matched by a recovery in EM value stocks.
Source: Pictet Asset Management, CEIC, Datastream, December 2017
Two factors could be at play. One is that investors possibly remain sceptical around the prospects for EM GDP growth. The other is that the strength of investor belief in tech stocks is still driving EM growth valuations.
We think this might be about to change, as the outlook for EM GDP growth is strong and improving, as already discussed above. This comes at a time when valuations of EM growth stocks look ever more stretched.
Investors in emerging markets should take a closer look at value stocks.
Source: Datastream, Bloomberg, data as at 31/12/2017 and in USD. Equity indices are quoted on a net dividend reinvested basis; bond and commodity indices are quoted on a total return basis. The currency rates evolution is treated as a performance calculation based on FX rates.
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This document is used for informational purposes only and does not constitute, on Pictet Asset Management part, an offer to buy or sell solicitation or investment advice. It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date. The effective evolution of the economic variables and values of the financial markets could be significantly different from the indications communicated in this document.
Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to change without notice. Pictet Asset Management has not taken any steps to ensure that the securities referred to in this document are suitable for any particular investor and this document is not to be relied upon in substitution for the exercise of independent judgment. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Before making any investment decision, investors are recommended to ascertain if this investment is suitable for them in light of their financial knowledge and experience, investment goals and financial situation, or to obtain specific advice from an industry professional.
The value and income of any of the securities or financial instruments mentioned in this document may fall as well as rise and, as a consequence, investors may receive back less than originally invested. Risk factors are listed in the fund’s prospectus and are not intended to be reproduced in full in this document.
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