Brexit expected to help emerging markets as
investors seek safer investments
As
investors fret about mounting Brexit woes, and its impact on wider economies,
and with the pound not showing any signs of recovery, fund managers are
advising their clients to go slow and look elsewhere for opportunities.
Post a
dead cat bounce witnessed last week after Brexit, global equities restarted
their leg down again, and this time as they pondered the whole process of the
exit, amid mounting concerns of sluggish growth despite the helicopter money
thrown in by central banks to prop up growth.
Investors
are looking for opportunities beyond Europe and the UK for more safer and
predictable investments, feels Gary Duagn, chief investment officer at Emirates
NBD.
“Attention
has turned to the ASEAN region where GDP growth of 5 per cent is being
maintained,” said Dugan. He mentioned Indonesia as the case in point. Indonesia
is expected to witness higher GDP in the second half of the year as government
spending picks up, thereby reinforcing investment spending.
“Indonesian
equities have made new highs in recent trading sessions and remain well
supported by Asian institutional fund buying. Indonesia bonds still trade at
reasonable spreads over treasuries and should find more support, despite the
likelihood of more debt issuance in the coming months,” Dugan said.
Among the
data points, Indonesia’s short-term external debt fell to $38.1 billion (Dh140
billion), the lowest since 2012. Among other ASEAN countries, Emirates NBD’s
Dugan feels that stocks in Thailand and Philippines were available for fair
value.
Nadi
Bargouti, managing director asset management at Emirates Investment Bank agreed
to Dugan’s view.
“We have
seen flows out of the UK, and we feel emerging market would benefit from this,
so we would be net positive for emerging markets,” Bargouti said.
Even so
far in the year, the emerging markets, which ASEAN is a part of, has
outperformed the developed markets.
The MSCI
Emerging Markets Index has advanced 5.7 per cent in 2016, compared with a 0.4
per cent loss in the MSCI World Index of advanced-nation shares.
Triggered
by the underperformance, European along with UK markets have been downgraded by
asset managers.
“We have
been neutral on Europe and the UK, and for the UK the economic prospects have
changed to the downside. We are cautiously monitoring these markets. We don’t
see it a reason for change our neutral stance at least for a next few weeks for
a better view of what will happen next,” Bargouti said.
Even
National Bank of Abu Dhabi has decided to reduce Eurozone equites to
underweight from neutral, while increasing emerging market bonds to overweight
from neutral.
Distorting realities:
Fund
managers have been also fretting about the easy monetary policy in the
developed markets, on which the equity market rally has been based on, as they
feel the QE has been distorting the economic realities.
“Easy
money policy in opinion is not fundamentally driven. and we can’t expect
central banks to bailout the markets indefinitely. Fundamentals have to improve
to reflect the new market or economic conditions,” Bargouti said, adding “there
is this disconnect between economics and the capital markets. This gap need to
shrink either by fundamentals or central bank actions.”
Before
the vote, Bank of England said they were ready with 250 billion pounds to
maintain monetary and financial stability and take all necessary steps. The
Brexit vote may also prolong the next hike from the US Federal Reserve, with
analysts expecting one rate hike at the end of the year. In Europe too,
analysts expect the ECB to extend the duration of the QE program from its early
2017 deadline.
“We were
hoping to see an end to the whole quantitative easing business. That’s a
frustration that equity markets would continue to be run by the central banks,
which is not economically viable over the long-term,” he added.
Siddesh
Suresh Mayenkar
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