Investors need to steer clear of investment in Mexico, Brazil, Turkey, South Africa and Poland and look to India, China and Russia for opportunity, according to BT Investment Management’s boutique fund manager, J O Hambro Capital Management (JOHCM).
Following Donald Trump being elected as US President, JOHCM’s senior portfolio manager, James Symes said, “[The move in the dollar and yields] was definitely very negative for some emerging markets (EM), but certainly if it comes with higher growth, other EMs should do quite well”.
EMs that ran deficit budgets and required bond financing would do poorly and it was worth steering clear of Mexico, Brazil, Turkey, South Africa and Poland, Symes said.
“We are very underweight in those markets,” he said.
“If yields continued to push higher, you will see capital flowing out of those markets and they are really quite dependent on ongoing financing for their bond markets,” Symes said.
Just as those markets were weak in 2013, we could experience the same thing in the next couple of quarters, he said.
A Trump presidency would be good for India and China (JOHCM’s preferred EMs, as policy makers supported reform and growth), while Eastern Europe would experience a lot of volatility.
The Polish stock market would pose a risk to investors, while Russia’s banks and energy companies would benefit, Symes said.
“We prefer India to China, but in both cases, domestic demand and consumer plays in India and China are doing very well and should be relatively unaffected by a Trump presidency [and what happens to the US bond market]”.
India was particularly sheltered as it was driven by its own cycle and demographics and ran a very small deficit, while China had a current account surplus. That meant they would not be dependent on financial flows and were therefore safer EM investments, he said.
