Despite declining growth data from China, emerging markets remain attractive to investors, seeing an upward swing of 25% in dollar terms since last October.
The softness of the Chinese economy will have a short-term impact on markets like Brazil, which exports a majority of its commodities to China, but as the Asian giant rebalances its economy away from investment and towards domestic consumption, a couple of periods of softer data are expected.
Overall, an 8% growth rate is still very attractive to investors and in the short-term, they can look at taking some profits in the emerging stocks that have recovered over the past few months.
“If we were to see the emerging markets come back at 5%-to-10%, that would start to be quite the interesting area given that we still have a positive view overall of the Chinese economy,” says Stephen Burrows, senior investment manager and product specialist for the emerging market team at Pictet Asset Management, subadvisor to the Renaissance Emerging Markets Fund.
He says there are two particular markets where investors currently have an overweight position in the current global emerging markets: Thailand and Indonesia.
Thailand, driven by very strong domestic consumption, is experiencing major income growth, with the minimum wage expected to rise by nearly 40% in April.
The wage hike will provide a boost to GDP in Thailand of close to 10%, and the country also has a very strong infrastructure-spending program.
Over the next ten years, the government is expected to spend about 22% of GDP on items such as railways, in particular high-speed trains.
“The added bonus from Thailand is they have quite a strong export sector and 55% of the exports in Thailand go to Asia,” says Burrows. “There are not a lot of economies dependent on the developed markets for their export growth so [Thailand] is quite attractive and less well followed than the major emerging markets.”
Indonesia, however, is the real star of emerging markets, with a very large and young population expected to provide strong domestic growth.
In addition, banking stocks are very attractive in Indonesia and are at a very early stage of development.
Similar to Russia and Brazil, Indonesia also has its own natural resources such as thermal coal, which is in high demand from China, and palm oil, of which it is the world’s largest exporter.
Burrows adds that “In terms of secular growth, Indonesia has one of the most attractive secular economic growth profiles compared to any emerging market.”