Big opportunity in EMs is 6-12 months away: Michael Howell

Long-term opportunities for emerging markets are immense. These markets are going to outperform developed markets very significantly, Michael Howell, MD,




CrossBorder Capital, tells ET Now.Edited excerpts: EM ETFs are finally becoming positive again. Do you expect this trend to sustain? It can be sustained. The two issues to face are a), what happens to the US dollar and b), what happens to China and specifically the Chinese market policy. The two major drivers for emerging markets are dollar and China and therefore the prospects for those two really will determine the direction and the speed and the size of capital flows to emerging markets. What is your view on EM currencies? Has there has been some significant depreciation over there? Put in this context, our mantra is that every emerging market crisis is first and foremost a currency crisis and therefore you can say on paper this looks very similar to normal crisis in the sense that currencies have weakened. But if you look behind the scenes, there are a number of very positive factors that imply this particular selloff in currencies is rather different from past and that makes us more optimistic looking forward. Emerging market economies include Latin America, the Indian subcontinent and Asia. The generation of cash flow from emerging market cooperation in underlying companies is far stronger than in past periods of emerging market crisis. The underlying economic fundamentals look much better. Second, if you look at dollar which is the other side of that currency depreciation, it is somewhere near peak. We are not in that school which says dollar goes up a lot from here and the main reason is that we can see deteriorating trends in the American economy which may expose the credit problem in America. Come 2019 and we believe that the Federal Reserve will be challenged in their attempt to raise interest rates further. Consequently, the dollar will come off. In our view, number one fundamental is better and number two, the dollar does not expect much appreciation. Five central banks are meeting this week. How will flows get impacted, especially when it comes emerging markets? Interest rates are not going up. But one has to look at the context of the extent to which central banks globally have been tightening through other means. One of those is quantitative tightening particularly by the largest central banks worldwide. We evaluate these flows of liquidity and our data tells that currently two-thirds of central banks worldwide are running tight policies. The more they tighten, the slower economic activity will be in emerging economies and our perception about easing policy in America is really a 2019 issue. We believe that the economies will begin to slow down, led by the America and that will lead central banks to reverse course sometime within the next 6 to 12 months. It may not be the correct time to invest heavily in emerging markets right now but the point is that over the next few months, things will become clearer and the opportunities would be greater. On your point about oil prices, high oil prices are clearly not good for India nor for many emerging market economies. But as the world economy begins to slow down, some of the tension will come out of oil prices and this should settle back to more average levels or a little bit below, may be around in $60 to $70 range.What is our view on emerging markets from a medium to longer term? Let us look at three different scenarios. A) short term, which may be next three months. B) Medium term or a 6-12 month view and; C) A longer term view which is really beyond a year. In short term, we still remain very nervous of markets generally. This is not just an emerging market question but it is really a question of all stock markets globally. simply because central banks are tightening. With two-thirds of central banks putting breaks on, stock markets will not be going up very much higher.Central bank tightening will cause the economies to inflate but ultimately attenuate. And as that cycle of interest rates comes down, emerging markets and other stock markets will do well. We think that the opportunity is about 6 to 12 months away. The long-term opportunities for emerging markets are immense. These markets are going to outperform developed markets very significantly and investors in the west and investors in emerging markets themselves have got to have much greater exposure to these economies. Will the long developed market, short EM trade unwind for the rest of the year? I am not sure about the rest of the year but in 2019, it will start to unwind. For the next few months, we still remain nervous about markets and one cannot change facts here.If you get a situation where developed markets are fragile, emerging markets will sell off perhaps more though we do know that these markets are generally very skittish in terms of downtrend. Looking beyond that, these are the times when you ought to start thinking about buying in at lows. Once markets bottom out which we would suspect could be in the second half of this year, then we will be much more interested about buying back to emerging markets. The 2019 should be a much better year than this year but on a medium-term view, beyond that 2020, 2021, etc, emerging markets really be the main thrust or driver of the world economy. How are this trade tariff related worries going to impact flows? Just the trade issue worries me a little bit but it is not really of great concern. The issue comes back to fundamentally what this debate is about and this debate is about technology transfer and America has already given away a lot of its technology to emerging markets, principally to China.What America wants to do is to level the playing field in terms of not allowing that technology transfer to take place. In the case of many emerging markets, however, what we have seen is that technology has already been transferred and many emerging economies are now innovators themselves. So America is closing the door perhaps too late and that is what fundamentally we believe that the trade war is really all about. The key question I think for emerging market investors to ask is why the Soviet Union never caught up with western economies and the reason was that they did not allow capital flows to Soviet Union nor did they allow technology transfer. Emerging markets today for the most part have got free capital movement and they got a miscible technology transfer. America may be trying to stop that but it is too late. Effectively emerging economies are now innovators and they got their own capital basis and that is why the opportunities in emerging markets are so fundamentally good in the medium term.

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