Dr. Amer Bisat, Managing Director and Head of Sovereign and Emerging Markets at BlackRock, joined our webinar to discuss the performance of emerging markets amid a high interest rate environment. The session was moderated by Naji Nehme, Chief Investment Officer at Petiole Asset Management AG.
Emerging Markets Readiness to Weather the Crisis
Although emerging markets were better prepared for this crisis than in previous episodes, they were not prepared enough. They had better access to debt to offset the crisis, higher reserves, and good fiscal policies that allowed them cut interest rates, ensure liquidity and intervene to weather the shock better than previous incidents. But this readiness was hampered by low growth compared to the 1990s and political events.
Themes to Look for in 2021
The growth in the developed world may translate into growth in emerging markets. As exporters of commodities, emerging markets would benefit from a rise in prices in the developed world.
The wide vaccinations in emerging markets enable them to better deal with the pandemic. Herd immunity is achieved sooner than expected.
However, debt in emerging markets increased by 11%, with a 60% average debt to GDP. Debt service burdens these countries.
Debt of Developed Markets vs. Emerging Markets
For the purposes of this analysis, Dr. Bisat excludes from emerging markets the most developed economies, such as China, Korea, Taiwan, Poland, Chile, etc.
Although debt is lower than in developed markets, the debt burden remains heavy in emerging markets as these countries can neither print dollars nor ask their central banks to buy their debt. They resort to companies like BlackRock to buy their debt at high interest rates and returns.
Chinese bonds are attractive as the country can tolerate high indebtedness. Its relationship with the US is clearly changing: the Trump administration thought that by pushing hard enough China would collapse. The approach of the Biden Administration is more systematic and comprehensive, applying pressure on multiple fronts beside trade. Tensions may seem to have eased, but the Chinese are far more wary of the Americans than they were last year.
Oil, Energy and Super Cycles
If we are entering a long period of global growth funded by aggressive fiscal policies in the US and Europe and high spending on infrastructure and manufacturing, we are in a super cycle of commodities. This will affect demand for oil directly.
If this is transient, resulting from reopening, pent-up demand and unsustainable fiscal policies, alternative energy sources will become the driver again and commodity prices will drop.
Dr. Amer does not foresee a 10- year cycle of growth. Eventually, in a year or two, fuel prices will drop.
The following cycle may not constitute a bull market similar to that from 2008 to 2019 despite multiple crises. Inflation remains a serious risk that may burst this bubble.
How to Invest in Emerging Markets
To simplify the comprehensive, complicated process adopted by Dr. Bisat and his team, they follow a top-down then bottom-up approach.
In the top-down approach, they consider three things:
1- The macroeconomic environment,
2- Valuations, and
3- A very strong view of technical arguments
The bottom-up approach entails studying each country before making a decision. The top three emerging markets are:
- - Mexico, which has strong fundamentals and should benefit from US growth,
- - Brazil, which has good companies to own and should benefit greatly from commodities, and
- - Indonesia, the truly emerging market in Asia
The countries that worry Dr. Bisat include Lebanon, Argentine and Turkey.
Hard Lessons Learned
Delving into emerging markets with certainty is a big mistake. Consider the many possibilities. Be prepared, humble and ready to tackle all scenarios.
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