Emerging markets are back in the spotlight after some years of underperformance, said an industry expert, adding that the stabilisation of commodity prices is creating the momentum for equities, bonds and currencies.

“We are cautiously more positive about the near-term. The structural problems of the world have not gone away, far from it. Rather we believe that some of the nasty risks have faded somewhat,” added Gary Dugan, chief investment officer at Emirates NBD in the bank’s latest “Wealth Report”.

“Our most important advice remains that investors should not chase returns through taking inappropriate levels of risks. Be happy accumulating modest returns through investment in credit, sukuks and selective equities,” he said.

“Some risks have diminished at least for the moment. Be careful though as many of them remain unresolved but some of the downside risk is diminished.”

While China still has its challenges the market is starting to believe that the government has a more credible plan to deal with some of the near-term problems. The experts are no longer talking about the imminent collapse of the currency or of insurmountable levels of default in the financial sector, according to Dugan.

The oil price has stabilised and looks less likely to collapse below $30. The pending meeting of Opec and non-Opec countries on April 17 should cement an agreement that caps production from at least some of the countries thus taking some of the oversupply risk out of the market.

“Deflation risk has subsided. Although equally there is little sign of a sustained increase in inflation,” said Dugan.

The US economy does not appear to be slipping into a recession. The economic data releases have a bias to upside surprise without indicating there is a significant phase of strong growth ahead of us.

“We would also make the point that while some of the downside risks have diminished, the upside risks to global growth are still very modest,” said Dugan.

Companies still appear very reluctant to expand their businesses. In particular, corporates still show a reluctance to invest heavily in future expansion. For example US durable goods orders for February reported last week, were weak again.

“Around the world, you struggle to find a corporate sector that is gearing up for growth. We note that at a recent analyst briefing that Ford gave in the US much of the talk was about planning for the next US recession and less about planning for growth,” Dugan pointed out.

“The stabilisation of global growth is far from uniform. Japanese data remains very sluggish. This week’s industrial production data is expected to show a significant fall in output after a good January.”

Data last week from Singapore and Taiwan was weak suggesting there is a need for further interest rate cuts. Taiwan’s export orders fell 7.4 per cent year-on-year in February. Taiwan’s central bank cut interest rates by 12.5bps to 1.5 per cent.

“While we are constructive on the outlook for the performance of emerging market assets, it is important to note that the call is based on an undervaluation of emerging market assets and not a clear improvement in emerging market economic growth,” Dugan said.

Emerging market growth hit a 3 per cent low in the fourth quarter of 2015 and there have been faint signs of an improvement since. At this stage, we believe that sufficient investors will buy on trust given the undervaluation of emerging market assets.

Turkey is a good case in point in the emerging market asset class where after a period of continued capital outflows the local bond market is starting to see real support from international investors.

In the last month according to data from CBRT the bond market has seen inflows of $952 million whereas equities have had an inflow of over $1 billion. Last year the bond market suffered outflows of $7.7 billion.

“We are still waiting for a catalyst to ignite some performance from the Japanese equity market.  Japanese equities have been a disappointing performer year-to-date down 10.7 per cent although for dollar-based investors the strength of the Yen against the dollar has reduced that loss to 5 per cent in dollar terms,” Dugan explained.

The positives remain in place; it is one of the few equity markets posting solid corporate profits growth in 2015 and 2016 and the corporate sector is only part of the way through implementing more shareholder-friendly policies to enhance long-term returns.

For the moment, foreign investors remain net sellers of equities, and they remain heavily underweight the market.

Should the economic data stabilise and/or the policy makers bring more initiatives to bear on supporting growth the market could have a sharp turnaround.

UK Sterling has come under renewed pressure as opinion polls suggest that the majority view is that the UK should leave the EU. With still many weeks to run before the vote in June, it would be wrong to draw too strong an inference from the opinion polls.

“Also, the anti-EU bias of the opinion poll came in a period where UK politics has been pretty dirty with resignations and recriminations within the government. The consensus view is sterling could fall as low as $1.23 on a Brexit vote. Hedging sterling against a fall has become a very expensive exercise with the cost of a three-month to sell sterling against the dollar rising sharply in recent weeks,” said Dugan.

“The stabilisation of the oil price is giving a good underpinning to local bond and equity markets. The hope that the oil market has seen its worst fears pushed to one side is helping confidence to slowly return. For sure the region still has its challenges. Governments will have to continue to work hard to reset budgets to cope with the lower oil price, but there is a growing confidence that the worst of the shock is behind us.

“In Dubai, registered real estate transactions hit Dh68.5 billion ($18.6 billion) in the first two months of the year, with a further acceleration of activity noted so far through March. Indeed, the Dubai equity market has led the rally in the local markets. If the rally of equity markets were to push on it will probably need to see Saudi Arabian equities push on to higher levels. The Tadawul index is still down 8 per cent year-to-date,” Dugan concluded. – TradeArabia News Service