‘Difficult period’ for emerging markets

Ongoing crises in China such as Evergrande have meant American Century are neutral on emerging markets (EMs) but vaccine accessibility is a reason for optimism.

In an investment outlook, Rich Weiss, chief investment officer for multi-asset strategies, said the firm was neutral on emerging markets.

“EM equities have endured a difficult period of late. But even as equity prices declined, the outlook for earnings growth brightened along with prospects of a global recovery. However, China’s ongoing economic and regulatory challenges create uncertainty in the space,” he said.

“As a result, we remain neutral on the asset class, preferring to rely on individual security selection decisions to identify opportunities in our EM allocation.”

Weiss particularly highlighted problems in China which had a regulatory crackdown last year and a property crisis caused by the failure of China’s second-largest developer Evergrande at the end of the year.

“We still face uncertainty around China’s energy policy, corporate regulations and the fate of its leading property development companies. Such uncertainty and potential volatility argue against overexuberance and for sticking to a well-diversified approach,” Weiss said.

“Falling home prices and mounting challenges for China-based real estate developers threaten to weaken China’s economic growth outlook.”

The report added inflation would also be a factor to watch in 2022 and that it was “uneven” between the different emerging markets.

“While rising prices are generally the trend throughout the world, inflation in some EM countries remains relatively subdued. For example, prices are ticking higher in China, but the annual inflation rate remains relatively low compared with other markets,” Weiss said,

“Meanwhile, Turkey, Brazil and Argentina are battling double-digit inflation rates. In addition to rising energy prices, monetary policy and currency devaluations have contributed to these soaring inflation rates”.

However, there were still reasons for optimism for emerging markets including improved access to vaccines, rising commodity prices and the ability to contain virus outbreaks which would prevent economic disruption.