Share

Why emerging markets are still attractive

Johannesburg – In a world with low growth, low returns and higher debt levels, emerging markets are offering high growth, high returns and have less debt, said Siboniso Nxumalo, co-head of Old Mutual Investment Group’s Global Emerging Markets boutique.

Following a presentation on the emerging markets outlook on Wednesday, Nxumalo spoke to Fin24 about some of the prospects that make these markets attractive.

“Structurally over the long term, emerging markets is where investors want to be,” he said. The younger populations in these markets are favorable for long term growth prospects. This contrasts with developed markets which face a shrinking workforce and a consumer population.

Developed markets have less consumers going forward, which will be a problem for consumption-led economic growth. Emerging markets have younger consumers with increasing purchasing power and higher demand for goods. Locally however the situation is different as South Africa’s population is facing the challenges of youth unemployment.

Additionally, in the world’s search for yield, high interest rates in emerging markets guarantee high returns and this is attractive to investors.  

Recently emerging markets have outperformed developed markets, following a five-year period of underperformance due to the effects of the slowdown in the commodity cycle, he explained. “Every product you buy is generally manufactured in an emerging market.” During the five-year global growth slump emerging markets were hit by the low demand for resources and manufactured goods.

But individual countries and companies within these countries restructured their balance sheets and labour. They used the time to fix themselves and prepare for next growth phase, said Nxumalo. “Now they are in a position to see growth.”

Political powers at play

Historically, emerging markets were perceived to have the highest political risk. Investors were deterred by the political uncertainty in markets such as Brazil, Russia and Turkey. However with the recent impact of Brexit and the possibility of Donald Trump winning the US elections in November, there is evidence of increasing political risk globally.

“Investors now find that wherever they invest there will be political risk,” said Nxumalo. “They would rather invest in a market that is cheaper and offers more growth.”

In markets like the US where the interest rates are virtually zero, investors had to look to emerging markets to guarantee returns. “Emerging markets have been benefactors of this search for yield,” said Nxumalo.

The chances of having capital flows drawn away from emerging markets if the Federal Reserve Bank (Fed) were to hike rates, are slim said Nxumalo. For this to work, the US should have economic growth. If the Fed hikes rates too much then it could force the economy into a recession, he explained.

Impact of a downgrade on local prospects

Locally markets have made provision for a downgrade and have priced in these effects in currency and government bonds. However Nxumalo said that the country should focus on fixing the remaining issues linked to the real economy such as unemployment and political stability, as pointed out by ratings agencies. “We need to fix these issues because they will remain whether we have a downgrade or not,” he said.

Johann Els, senior economist, said the economic outlook for the short term is “slightly more optimistic”. “The rand is looking more stable and stagflation turned out to be milder than earlier anticipated, given better recent growth data and milder inflation.” The inflation rate is expected to be lower in 2017 and possibly below 5% by May 2017, he added.

Read Fin24's top stories trending on Twitter:

We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
18.98
-0.4%
Rand - Pound
24.00
-0.4%
Rand - Euro
20.51
-0.2%
Rand - Aus dollar
12.35
+0.0%
Rand - Yen
0.13
-0.4%
Platinum
903.65
+0.8%
Palladium
1,016.75
+1.5%
Gold
2,207.48
+0.6%
Silver
24.59
-0.2%
Brent Crude
86.09
-0.2%
Top 40
68,260
+0.9%
All Share
74,450
+0.7%
Resource 10
57,117
+2.6%
Industrial 25
103,835
+0.6%
Financial 15
16,488
-0.2%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders