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MUST READ: Top emerging markets picks for 2017

Dec 29 2016 08:17
Ahmed A. Namatalla and Selcuk Gokoluk

Cairo - Almost everybody loves Russia and wants to get as far away as possible from Turkey. That just about sums up investor sentiment toward the developing economies of Europe, the Middle East and Africa (EMEA).
 
Money managers’ top calls for next year are hinging on markets where the political climate is improving and assets are less vulnerable to external shocks arising from higher US borrowing costs and President-elect Donald Trump’s policy announcements.

Within politically stable markets, investors are looking for cheaper valuations and an ability to pace a rally in commodity prices.

Currencies

UBS Group says Russia’s rouble will offer the best-carry trade opportunity in EMEA over the next 12 months, with a potential return of 26%.

Relatively high interest rates and recovering oil prices will drive the currency’s appreciation, the Zurich-based investment bank says.

JPMorgan Chase expects the Czech koruna to be resilient to global risk and outperform its peers due to support from a strong balance of payments.

Morgan Stanley bets on a rebound in eastern European currencies, especially Poland’s zloty, if political risks in Europe don’t deepen. Most people warned against buying Turkish assets.

James Lord, a market strategist at Morgan Stanley, is sticking to his bearish view of the lira, even though it appears to be cheap. He says the lack of focus on productivity growth as wages rise will continue to undermine the currency’s competitiveness.

Stocks

NN Investment Partners sees the Russian equity market as an “obvious candidate.” Higher oil prices, a stronger rouble and easing inflation should encourage the country’s central bank to loosen monetary policy, said Nathan Griffiths, who helps manage about $750m.

Griffiths also expects the FTSE/JSE All Share Index in Johannesburg to rally, benefiting from curbs on President Jacob Zuma’s power.

Aviva Investors considers small-cap companies in developing markets attractive, especially in retail, health and industrials. Ian Pizer, the London-based head of investment strategy and co-fund manager at Aviva, says heavy domestic ownership gives those companies a buffer.

Capital Economics says banks in central and Eastern Europe, the Middle East and Africa are improving their financial ratios, though lenders in Russia and Turkey are still in the doldrums.

Bonds

Deutsche Bank expects growing stability in domestic politics to benefit Russian and South African bonds. Russia should gain from an improving relationship with the US, while South Africa will probably avoid a debt downgrade, the German lender says.

Denmark-based Global Evolution Fonds favours Egypt’s local bonds, after yields rose to almost 20% and the currency’s value halved following its free float.

Global Evolution recommends Nigeria to investors who can make a "leap of faith" as he expects political stability to improve next year and the government to make a second attempt to float its currency.

Ghana’s peaceful transfer of power after its 2016 presidential election, and increased oil production make its local-currency notes and Eurobonds attractive, says Stephen Bailey-Smith, who helps manage $4.2bn at Global Evolution.

Neuberger Berman Europe says Turkey’s foreign-currency bonds are cheap as it deems domestic risks to be fully priced in.

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equities  |  emerging markets  |  markets

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