Venture forth in emerging markets, but be cautious on funding risks

We see selective value in fixed income with more to come as the US dollar eases

Time to read: 4 min

A tightening of financial conditions, led by US Federal Reserve (Fed) rate hikes and an appreciating US dollar, have pressured emerging market (EM) assets so far this year. However, Invesco Fixed Income believes that concern over a generalized “crisis” in EM external debt (and external vulnerability) is largely unwarranted. That said, structural impediments are likely to limit EM growth over the medium term – particularly in the context of a stronger US dollar. We believe there is selective value in EM right now in markets that have been unjustifiably impacted by tightening US dollar funding conditions.

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Three reasons to reconsider emerging markets

While EM has lagged overall in 2018, some EM factors did outperform

Nick KalivasTime to read: 5 min

The numbers don’t lie — emerging equity markets (EMs) have dramatically lagged US equities in 2018 as shown in the table below. The chaos in EM is best exemplified by the Brazilian elections, Russian sanctions, deleveraging in China, and the South African land redistribution policy. However, in some cases, factor-based approaches fared better than the overall market in EM, and I believe there are three indicators suggesting it may be time to reconsider this asset class.

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Worried about emerging markets? Consider the low volatility factor.

History shows that when EM stocks sell off, US low vol stocks generally outperform

Nick KalivasTime to read: 2 min

Emerging markets (EM) have been turbulent throughout 2018 due to US-China trade tensions, the deleveraging of the Chinese economy, Brazilian political uncertainty, Middle Eastern conflict and Russian sanctions. The recent plunge in the Turkish lira has only added to investors’ jitters. As EM stocks fall, many investors may be looking to US stocks as a hedge against risk. Based on past periods of EM turbulence, I believe US low volatility stocks in particular warrant a closer look.

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Emerging markets sell off in the second quarter

Trade tensions, macro concerns and a strong US dollar add volatility and possible opportunity

Time to read: 3 min

By any measure, emerging markets (EMs), as represented by the MSCI Emerging Markets Index, had a tough second quarter, dropping 8.7%1 in US dollar terms and significantly trailing developed markets. The underperformance was mainly driven by macro concerns, trade tensions and election uncertainties. Taken together, these had a negative impact on consumer and business confidence, as well as growth forecasts. However, while we don’t expect a quick resolution to these issues, the Invesco International and Global Growth team continues to find attractive EM opportunities through our bottom-up Earnings, Quality and Valuation (EQV) approach.

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Emerging market elections in 2018 sow uncertainty

The people will decide — two dozen times

Time to read: 3 min

In the last couple of years, election surprises seem to have been the rule rather than the exception. Great Britain, Germany, Japan and the US are all examples, with these countries continuing to experience considerable fallout from the results. In my opinion, we ain’t seen nothing yet — by the close of 2018 there will have been 24 elections within emerging market (EM) countries. Each brings the risk of significant policy change, good or bad. Markets don’t like uncertainty, so EM volatility has jumped this year. We expect this volatility in emerging markets to continue as the likelihood of election surprises and non-market friendly policies is elevated.

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