Tillväxtmarknaderna har gått sidledes under året, men men ETF-investerare kan hitta en tillväxtmöjlighet bland utvecklingsekonomierna när dessa marknader återhämtar sig. Det kan till och med bli bättre än så. Emerging Market vinnare 2019 säger Goldman Sachs.
Investeringsbanken Goldman Sachs förväntade sig att emerging market aktier, valutor och obligationer kan komma att att se en blygsam återhämtning nästa år, rapporter från Reuters. ”Vi förväntar oss blygsam positiv avkastning över de stora EM-indexen nästa år, om än med låg riskjusterad avkastning”, säger analytiker vid Goldman i sin 2019-prognosrapport.
Tillväxtmarknadsaktierna kan uppleva den största ökningen
De bankprojicerade tillväxtmarknadsaktierna kan uppleva den största ökningen med 12% i dollar, medan EM-valutorna bör stärkas med cirka 2% i genomsnitt på ekonomiska förbättringar och en blygsamt svagare amerikanska dollar. Samtidigt tillade de på den lokala valutamarknaden att ett noggrant spårat skuldindex för GBI-EM skulle kunna se en 10% återhämtning på en ”omhävd” basis och inkludera ”varaktiga effekter”.
Ett antal sätt att få exponering mot Emerging Market
Investerare som tror på tillväxtmarknaden har ett antal sätt att få exponering för det internationella segmentet. Till exempel har Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) och iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG) varit populära sätt att få bred exponering mot Emerging Market.
Dessutom ger något som Goldman Sachs ActiveBeta Emerging Markets Equity ETF (GEM) en smart beta- eller multifaktorstrategi till tillväxtmarknaderna. GEM försöker reflektera utvecklingen av Goldman Sachs ActiveBeta Emerging Markets Equity Index, som inkluderar exponering för att utveckla marknadslager, men väljer komponenter baserade på bra värde, stark momentum, hög kvalitet och låg volatilitet.
WisdomTree Emerging Currency Strategy Fund (NYSEArca: CEW) ger exponering mot amerikanska dollar rörelser sig mot en diversifierad korg av valutor från emerging market.
Dessutom finns VanEck Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC) WisdomTree Emerging Markets Local Debt Fund (NYSEArca: ELD), SPDR Bloomberg Barclays Emerging Markets Local Bond ETF (NYSEArca: EBND) och iShares Emerging Markets Local Currency Bond ETF (NYSEArca: LEMB). De ger alla exponering mot emerging markets obligationer som är denominerade i sina lokala valutor, vilket bör ge en extra spark om tillväxtmarknadsländernas valutor stiger i värde mot den amerikanska dollarn. Detta inträffar om emerging market vinnare 2019.
Attractive risk-adjusted yields in emerging markets
ETF Securities Fixed Income Research – Attractive risk-adjusted yields in emerging markets
Summary
The shock to global markets from Brexit has raised expectations for more central banks’ intervention and sharpened the search for yield among investors. Middle East
Turkey’s political risk is likely to have a limited impact on EM outside of the. The Chinese economy and Fed policy will remain the main drivers for EM debt returns.
The slowdown of global growth favours duration risk over growth risk. Emerging sovereign bonds are attractively valued compared to emerging equities.
1990’s lessons learned
Emerging Markets (EM) learned the lessons from the Asian Crisis of the late 1990’s, particularly from an external financing perspective. Notwithstanding regional variation, in general emerging countries have built higher stocks of currency reserves and are less reliant on short term debt, particularly in hard currencies than in the past. (Click to enlarge)
As a rule of thumb, EM countries with robust fundamentals – solid internal (positive fiscal balance) and external conditions (positive current accounts balance) – are far more resistant to rate shocks. In March 2015 when the Fed started to signal an imminent lift-off, EM countries with stronger current account positions experienced lower currency depreciation than those with large external imbalances.
(Click to enlarge)
Turkey’s assets under pressure
The attempted coup which was carried out on Friday 15 July resulted in a 4.8% drop in the Turkish lira against the US dollar on the day. On Wednesday 20 July, S&P downgraded Turkey’s local currency denominated debt one notch to BB+ and maintained its negative outlook. The Turkish lira weakened by 1.1% to 3.0755 against the US dollar on the move. Turkey is running the largest current account deficit among the emerging countries (-4.5% of GDP as of July 2016) and has relatively low currency reserves. Given the sharp rise in political instability and deeper external imbalances, Turkish assets and the Turkish lira are likely to remain under pressure going forward. However, any spill over effects from the events in Turkey toward the other EM countries should remain limited outside of the Middle East region.
China is the main driver behind EM returns
The slowdown of the Chinese economy has already been priced-in into the market early this year. However, the Chinese economy has exhibited signs of stabilisation since then. Chinese GDP grew by 6.7%yoy and industrial production rose by 6.2%yoy. The Chinese authorities have continued to provide fiscal and monetary policies to support short term growth. In June, fiscal expenditure growth grew by 20.3%, money supply (M2) grew by 11.8% and total social financing (TSF, i.e. credit growth) increased RMB1630bn. The very large amount of total debt in China (in excess of 260% of GDP) raises concerns for growth over the long term but is manageable in the short term thanks to decent fiscal space (i.e. low level of government debt1).
Stability of the Yuan is essential for the stability of EM currencies. In our view, further devaluations of the Yuan are unlikely as China has low incentive to do so. As a large importer, China has limited incentive to devalue further because higher imports prices will cause a deterioration of the current account balance. China runs a trade surplus so if anything the Yuan should appreciate as the demand for the Yuan to pay exporters exceeds the need for foreign currencies to pay imports. As a result, EM local currency risk looks contained in the near term.
What if there is another rate shock?
The US dollar stability is also crucial for the stability EM currencies. So far, the procrastination of the Fed in hiking interest rates has prevented the US dollar from appreciating further, in turn reducing the volatility of EM currencies. We expect one additional 25bps rise in the Fed funds rate this year along with an accelerating US economy. In our opinion, this should only result in a modest appreciation of the dollar. In general, a stronger US dollar tends to challenge EM assets, but it depends on the basis for the strengthening. The U.S dollar is currently appreciating because of continued expansion in the US – a supportive environment for global trade. Exporters will benefit from increasing competitiveness and increasing US demand. However, those that rely on hard currency short term external financing (i.e. Turkey, Mexico, South Africa) would be the most vulnerable.
(click to enlarge)
The Latam region has been the most vulnerable to higher US rates in recent years. Latam countries face sizeable domestic economic and political vulnerabilities that tend to exacerbate capital outflows during times of market stress. Latam markets are also more liquid than their peers and are thus easier to short in times of stress.
(click to enlarge)
Search for yield will continue in the medium term
The market shock resulting from Brexit drove expectations for more central bank intervention and sharpened the search for yield. We maintain our long-term positive view on EM debt for three main reasons. First, most EM have limited exposure to the UK economy. Second, lower inflation in EM countries permit looser monetary policy which should support near term growth. Third, valuation of EM debt remains attractive relative to EM equity markets. While the Bond Equity Earnings yield ratio is declining rapidly, it is still greater than 1, implying that EM equities are overvalued relative to EM sovereign bonds. (click to enlarge)
Conclusion
The fundamentals of EM countries are more robust than in the 1990’s, limiting the risk of a crisis. The low yield environment will continue to push traditional investors outside their comfort zone, forcing them to look for risk-adjusted yield in the EM universe. In general, investors are increasing exposures to emerging markets2 helping EM countries to trade on their own fundamentals.
2 According to EPFR Global, Emerging market bond funds attracted US$3.42bn of inflows in June. 3 ETF Securities Research 2016
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Capital outflows and currency stabilization in China help the overall emerging markets (EM) environment
Headwinds including leverage in China, fiscal deterioration, and European issues remain prevalent
Liquidity, defensive positioning and unconstrained approach remain crucial in periods of uncertainty
Market Overview
The market environment remains unsettled. The quality of the macro flow in major economies is still very uneven (despite a larger number of positive macro surprises in both developed G10 and EM) and many central banks find themselves in a policy quagmire where additional monetary easing results in stronger currencies and higher interest rates. Markets – no doubt “inspired” by Janet Yellen’s end-of-March speech – continue to price in a very dovish scenario for the Federal Reserve (Fed) that envisages only two full policy rate hikes in the next three years. A big increase in neutral investor positioning (as measured, for example, by the American Association of Individual Investors) in past weeks is a reflection of these uncertainties which, in turn, is a byproduct of tensions between serious macro/policy headwinds and tailwinds. The “tailwinds” cluster includes a more sanguine near-term outlook for China, tentative signs that EM growth might be bottoming out, and reasonably strong external accounts in many EMs. On the “headwinds” side of the equation, we find multiple unresolved issues in Europe, major imbalances in China (possibly made worse by the recent policy moves), a Fed struggling with forward guidance, a massive widening of the EM fiscal gap, and deteriorating corporate profitability.
Portfolio Review
We believe that the recent tailwinds are likely to dominate for the near term. It looks like Chinese authorities have managed to slow down capital outflows through official channels. The decline in international reserves is now smaller than in November-December 2015. Authorities are also implementing additional measures to support growth, mainly through additional credit supply. Possible fiscal stimulus might prop up GDP growth as well. These factors should reduce the immediate depreciation pressure on the renminbi (CNY) and authorities should be able to maintain the existing exchange rate regime for a little longer, alleviating concerns about the impact of CNY devaluation on other emerging market currencies (especially in Asia). Additional EM foreign exchange (FX) strength is a benefit to the inflation outlook and in this environment, the Fed’s dovish policy stance might provide EM central banks with more room to ease, which could facilitate a cycle of stronger currencies, lower inflation, lower interest rates and a better growth outlook. There are already tentative signs (better macro surprises and higher PMIs) that the growth outlook in EM might be improving. Consensus forecasts for 2016 quarterly GDP growth in EM have also been edging up since mid-March and additional policy support might prove crucial for further progress. Lower inflation can further boost real interest rates in EM, which already look attractive relative to the past lows and relative to U.S. Treasuries (UST). An important, although temporary, aspect of China’s current policy mix is its positive impact on the housing market and, as such, on global commodity prices, especially metals, which should provide additional support to EM FX and external balances.
However, persistent headwinds abound. Our key concern is that China’s near-term growth/FX relief might come at the price of worsening imbalances, which will likely make any future resolution more problematic. Specifically, the leverage context remains highly worrisome as authorities intend to accelerate M2 money supply (includes cash, checking and savings deposits, money market mutual funds) growth. The same applies to a very high bank assets/nominal GDP ratio (especially when compared to China’s still relatively low per capita GDP). The success of China’s credit boost is questionable given that it now takes four extra units of credit (measured by Total Social Financing, a figure the Chinese government created to track all the money in its system) to produce one extra unit of nominal GDP. Despite the recent small improvements, both China’s growth slowdown and the decline in international reserves are of historic proportions and the reserve adequacy now looks stretched on several metrics. So, while we acknowledge the recent positive signals coming from China, our longer-term view on China’s economic, policy and, political challenges remains unchanged.
Another set of concerns relates to the recent fiscal deterioration in EM and rating downgrades it might entail. After several years of stability (2010-2014), the aggregate EM fiscal gap widened sharply in 2015, reaching 3.7% of GDP – the worst in the past 15 years – and consensus expects further deterioration to 4% of GDP in 2016. We doubt that rating agencies will respond kindly to the deterioration and we expect further rating/outlook downgrades.
Our third set of concerns centers on unresolved European issues. The potential for Greece to leave the eurozone (“Grexit”) is resurfacing again and will keep on reappearing unless there are more radical steps to help reduce the debt burden. The immigration/refugee issue looks thoroughly mishandled and we should expect further instances of political extremism. The situation in the banking sector appears murky at best and bank credit default swap spreads started to widen again after a brief post-European Central Bank (ECB) respite in early March. There is also growing evidence that negative interest rates are punishing banks. Finally, corporate profitability is deteriorating and capex spending remains high relative to cash flow from operations.
The portfolio implications of these developments are as follows: (1) be nimble and liquid (and the unconstrained approach is more important than ever); (2) be aware of the headwinds that we view as resurgent and have a reaction function (ours is when China’s property market stalls again and/or the Fed hikes); (3) respect tailwinds in downturns – big and long rallies often happen when things are bad.
Specifically, we maintain our defensive positions (approximately 40% of the portfolio) in hard-currency bonds with spread/beta positions (i.e., Argentina and Brazil) and/or with defensive characteristics (i.e., South Korea). We also maintain selective exposure to local-currency denominated bonds (approximately 50% of the portfolio). We focus on countries with high real interest rates, where central banks that are not afraid to tighten if necessary and whose currencies were allowed to depreciate during the past risk-off episodes (i.e., Mexico, Indonesia, Malaysia, and Brazil). Finally, we have exposure to selective EM corporates (about 10% of our portfolio) with a focus on liquid companies that demonstrate low-beta to the economy and that can benefit from FX weakness through local-currency costs.
Exposure Types and Significant ChangesThe changes to our top positions are summarized below. Our largest positions are currently: Brazil, Mexico, Argentina, Peru, and South Africa.
We added local-currency sovereign exposure in Indonesia and Peru to potentially benefit from the uptick in commodity prices and lower than expected inflation that allowed the Bank of Indonesia to cut and the central bank of Peru to hold. We also expect to benefit from changes in Indonesia’s regulatory environment that should boost local demand for government bonds.
We also added local-currency exposure to Brazil where impeachment sentiment is rapidly gaining momentum and inflation appears to be topping off. We also increased local exposure in Mexico and Malaysia where inflation remains under control.
We reduced hard-currency sovereign exposure in South Korea and Israel – low beta bonds that have performed well but have been reduced to reallocate to more compelling opportunities.
We also reduced hard-currency sovereign exposure in the Philippines, Chile, and Hungary (where Prime Minister Viktor Orban’s fight with the EU has intensified lately).
Fund Performance
The Fund (EMBAX) gained 3.27% in March, compared to a 6.16% gain for a 50% local-50% hard-currency index.The Fund’s biggest winners were Brazil, Mexico, Argentina, and Peru. The Fund’s biggest losers were Israel, South Korea, and Indonesia.
Turning to the market’s performance, the GBI-EM’s biggest winners were Russia, Colombia, and South Africa. The biggest losers were Nigeria, China, and Thailand.
The EMBI’s biggest winners were Ecuador, Mongolia, and Zambia, while its biggest losers were Serbia, Poland, and Romania.
Manager Commentary
By: Eric Fine, Portfolio Manager
Please note that the information herein represents the opinion of the portfolio manager and these opinions may change at any time and from time to time.
Diversification does not assure a profit or prevent against a loss.
Expenses: Class A: Gross 1.32%; Net 1.25%. Expenses are capped contractually until 05/01/16 at 1.25% for Class A. Caps exclude certain expenses, such as interest. Please note that, generally, unconstrained bond funds may have higher fees than core bond funds due to the specialized nature of their strategies. The tables above present past performance which is no guarantee of future results and which may be lower or higher than current performance. Returns reflect applicable fee waivers and/or expense reimbursements. Had the Fund incurred all expenses and fees, investment returns would have been reduced. Investment returns and Fund share values will fluctuate so that investors’ shares, when redeemed, may be worth more or less than their original cost. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at Net Asset Value (NAV). Index returns assume that dividends of the index constituents have been reinvested. Investing involves risk, including loss of principal; please see disclaimers on next page. Please call 800.826.2333 or visit vaneck.com for performance current to the most recent month ended.
Data Sources: VanEck Research, FactSet. All portfolio weightings and statements herein as of March 31, 2016. Unless otherwise indicated.
Duration measures a bond’s sensitivity to interest rate changes that reflects the change in a bond’s price given a change in yield. This duration measure is appropriate for bonds with embedded options. Quantitative Easing by a central bank increases the money supply engaging in open market operations in an effort to promote increased lending and liquidity. Monetary Easing is an economic tool employed by a central bank to reduce interest rates and increase money supply in an effort to stimulate economic activity. Correlation is a statistical measure of how two variables move in relation to one other. Liquidity Illusion refers to the effect that an independent variable might have in the liquidity of a security as such variable fluctuates overtime. A Holdouts Issue in the fixed income asset class occurs when a bond issuing country or entity is in default or at the brink of default, and launches an exchange offer in an attempt to restructure its debt held by existing bond holding investors.
Emerging Markets Hard Currency Bonds refers to bonds denominated in currencies that are generally widely accepted around the world (such as the U.S.-Dollar, Euro or Yen). Emerging Markets Local Currency Bonds are bonds denominated in the local currency of the issuer. Emerging Markets Sovereign Bonds are bonds issued by national governments of emerging countries in order to finance a country’s growth. Emerging Markets Quasi-Sovereign Bonds are bonds issued by corporations domiciled in emerging countries that are either 100% government owned or whose debts are 100% government guaranteed. Emerging Markets Corporate Bonds are bonds issued by non-government owned corporations that are domiciled in emerging countries. A Supranational is an international organization, or union, whose members transcend national boundaries and share in the decision-making. Examples of supranationals are: World Bank, IMF, World Trade Organization. The European Central Bank (ECB) is the central bank for the euro and administers monetary policy of the Eurozone, which consists of 19 EU member states and is one of the largest currency areas in the world. The Labor Market Conditions Index (LMCI) is a dynamic factor model index that combines 19 labor market indicators to provide an assessment of overall labor market conditions. The Employment Cost Index tracks the changes in the costs of labor for businesses in the United States economy.
All indices are unmanaged and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made. The 50/50 benchmark (the “Index”) is a blended index consisting of 50% J.P. Morgan Emerging Markets Bond Index (EMBI) Global Diversified and 50% J.P. Morgan Government Bond Index-Emerging Markets Global Diversified (GBI-EM). The J.P. Morgan Government Bond Index-Emerging Markets Global Diversified (GBI-EM) tracks local currency bonds issued by Emerging Markets governments. The index spans over 15 countries. J.P. Morgan Emerging Markets Bond Index (EMBI) Global Diversified tracks returns for actively traded external debt instruments in emerging markets, and is also J.P. Morgan’s most liquid U.S-dollar emerging markets debt benchmark. The J.P. Morgan Emerging Country Currency Index (EMCI) is a tradable benchmark for emerging markets currencies versus the U.S. Dollar (USD). The Index compromises 10 currencies: BRL, CLP, CNH, HUF, INR, MXN, RUB, SGD, TRY and ZAR. The Consumer Confidence Index (CCI) is an indicator designed to measure consumer confidence, which is defined as the degree of optimism on the state of the economy that consumers are expressing through their activities of savings and spending.
Information has been obtained from sources believed to be reliable but J.P. Morgan does not warrant its completeness or accuracy. The Index is used with permission. The index may not be copied, used or distributed without J.P. Morgan’s written approval. Copyright 2014, J.P. Morgan Chase & Co. All rights reserved.
Investing involves risk, including loss of principal. You can lose money by investing in the Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. The Fund is subject to risks associated with its investments in emerging markets securities. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctua-tions, and economic and political risks, which may be enhanced in emerging markets. As the Fund may invest in securities denominated in foreign currencies and some of the income received by the Fund will be in foreign currencies, changes in currency exchange rates may negatively impact the Fund’s return. Derivatives may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. The Fund may also be subject to credit risk, in¬terest rate risk, sovereign debt risk, tax risk, non-diversification risk and risks associated with non-investment grade securities. Please see the prospectus and summary prospectus for information on these and other risk considerations.
Investors should consider the Fund’s investment objective, risks, and charges and expenses carefully before investing. Bond and bond funds will decrease in value as interest rates rise. The prospectus and summary prospectus contain this as well as other information. Please read them carefully before investing. Please call 800.826.2333 or visit vaneck.com for performance information current to the most recent month end and for a free prospectus and summary prospectus.
Tactical Asset Allocation Relative Strength Signal (TAARSS) Monthly Update
Top recommendations for May: Intl DM, EM, Hong Kong, and Indian equities, and Energy Commodity.
Market review
Risky assets had a good month in April with Global equities (ACWI) and Commodities (DBC) advancing by 2.9% and 7.1%, respectively. While US bonds (AGG) edged slightly lower by 0.3%.
The monthly equity regional and market, and the commodity sector TAARSS rotations recorded the best results of our model for the month of April.
Tactical positioning for May 2015 based on TAARSS
This month in global equity markets prefer Intl DM and EM, and stay neutral to the US. Region wise prefer Europe and Asia Pacific, with some Latin America exposure, while keeping a minimal allocation to North America. In US equities prefer Small and Mid caps over Large caps. Sector wise Defensives ex Utilities present the best support in the US, especially Telecom. Domestic Cyclicals are experiencing some selling pressure. In Intl DM countries prefer Hong Kong, Japan, and Germany. Within EM countries, most of them experienced positive support with India continuing to show strong investment demand support despite its second month of performance setback; in addition, China, Mexico, and Russia also exhibited some noteworthy support. In Fixed Income we did not see any notable flow trend readings. Within commodities, we saw some positive developments for energy. See Figure 13 and Figure 14 for full allocation details for the month of May.
Tactical Asset Allocation Relative Strength Signal (TAARSS) Monthly Update
For February prefer European equities with currency hedge, US Defensives, US Energy equities and commodities, Gold miners, and Indian equities.
Market review
The year started tough on risky assets with Global equities (ACWI) and Commodities (DBC) down by 1.3% and 5.7%, respectively in January. While US bonds (AGG) benefited from safe haven demand and gained 2.05%.
Monthly TAARSS strategies underperformed and quarterly strategies outperformed their benchmarks in January. Multi Asset was up by 1.0% in Jan.
Tactical positioning for February 2015 based on TAARSS
Within equities we see new upside opportunities in DM Intl, good support for the US, and some degree of selling pressure in EM for February. Within regions we recommend to take advantage of the European support, maintain allocations to the US and Asia Pacific, and steer away from Latin America. For European exposure we see even more support in currency hedged products. Within the US, we prefer Small and Mid Caps over Large Caps for February, or a total market or equal weighting approach. In terms of sectors, Defensives (e.g. Utilities, Health Care) continue to display support; while Energy has begun to show interesting support.
However Domestic Cyclicals are losing some momentum. In International DM countries we advice caution and we still prefer a multi-country diversified exposure.
However if country exposures are desired then Germany and Japan may seem interesting – both with a currency hedge though. For EM equities we see India with the strongest support. In fixed income, signals suggest IG rates and income via US Treasuries and Municipals. Lastly for commodities, we see interesting developments of investment demand supporting Energy and Gold.
