As we usher in the new year, investors worldwide scramble for the most recent news and most relevant forecasts, in hopes of finding the biggest investment opportunity. Continuing our review of the past year’s market shaking events and analysis of the top investable asset class this year, let us evaluate the performance of emerging markets in 2017 and share our insights on how they can help you emerge victorious in the markets.

Thriving BRICS

With many major events in the US including Trump’s election victory and the Federal rate hikes, creating large turbulence in the markets last year, it is no surprise that they will continue to impact the market and create far-reaching ripples this year. At this point of writing, we are just 2 weeks to Trump’s inauguration and with the possible exacting of his trade policies, many fear for the trade war that might occur when the 45th US President takes office.

If Trump keeps to his words and proceeds with his protectionist policies, many countries that have strong trade links with the US would be adversely affected, especially the export-dependant countries. In stark contrast, “Brazil, Russia, India and South Africa are less at risk,” as pointed out by Goldman Sachs analysts.

BRICS is an acronym coined to describe the 5 major emerging economies – Brazil, Russia, India China and South Africa – that wields significant power globally, “holding 30% of the world GDP and 17% share in the world trade”.

Trump has been a strong critique of global trade policies which he believes is the main reason behind the severe US trade deficit and high unemployment rates, especially in the manufacturing industry. During his campaigning period, he hinted at withdrawing from major trade agreements such as the North American Free Trade Agreement and the Trans Pacific Partnership so as to stimulate the local economy and in turn boost the underperforming industries.

Goldman Sachs conducted a deeper analysis of the trade links between the US and the emerging markets. It revealed that these countries are less affected by the potential US trade barriers because “their exports compete less directly with U.S. labor”. These emerging markets would continue their strong growth from 2016 and retain its strong foothold in the global economy in 2017.

“We see emerging-market debt in a strong position in 2017,” Blackrock analysts asserted while presenting their strong recommendations in the sovereign debts of the emerging BRICS. With the negative yields in various developed countries, emerging market bonds prove to be a safe haven as these economies continue to mature and hustle for robust growth.

China Lands By Its Own

Notably leaving China out of the recommendations on BRICS, analysts have significant doubts of how it would pan out for the second largest economy this year.

After the Yuan receded to its lowest in 8.5 years, it continued to fall and hit 6.964 per dollar earlier this week. Analysts forecasted that it would further “retreat to 7.3 per dollar by year-end”. The slowing growth in China for a consecutive 8 years, coupled with the serious capital flight and the mounting debt of up to 290% of GDP, have all raised fear of a hard-landing in China.

While China is widely expected to only achieve a modest growth of 6.5% in 2017, Asian Development Bank’s President Nakao believes that China can avoid a hard landing this year.

He explained that the economy is in the midst of adjusting its focus from manufacturing to services. Just last month, China’s services sector rose to a “17-month high” and is believed to lend huge support to the Chinese economy as it matures.

Besides, analysts believe that domestic consumption would maintain the small yet resilient growth. In the third quarter of 2016, it contributed to 4.8 percentage point of economic growth. Meanwhile, the government is optimistic of their export figures and believe that investments would contribute another 2 percentage points.

The systemic issues in China would hinder its progress and result in a relatively lacklustre performance compared to the other countries in the BRICS bloc. However, its modest growth would be something noteworthy for investors interested in the emerging markets.

India, Indonesia and Thailand Perform the Best in Asia

Aside from BRICS, investors are also paying a lot of attention to the Asian markets. Asian Development Bank President, Nakao predicts a 5.7% growth in Asia and believes that the “growth momentum” would continue in the new year.

Asian economies such as Singapore, Taiwan and Korea that are more reliant on exports would likely fare worse. With the looming uncertainty in global trades, there has not been much confidence in these countries with trade-led economic growth

Trans-Pacific Partnership (TPP), a trade agreement signed by 12 countries including several Asian economies such as Singapore, Japan, Vietnam and Malaysia, account for 40% of world trade. TPP also contributed to 30.1% and 20.1% of trade in Vietnam and Malaysia respectively. The withdrawal of US from this agreement would result in a loss in access to the 325 million consumers in the world’s largest economy and create a significant drag to these export-driven economies.

Analysts however recommend investors to redirect their attention to India, Indonesia and Thailand. These economies are expected to perform the best in 2017 among their peers in Asia.

The Thailand SET Index rose by 20% last year and was the second leading index in Asia, largely because of the bullish oil markets. Joko Widodo, Indonesia’s President, recently launched a tax programme that earned the government $7.7 billion in revenue which Joko pledged to use on infrastructure projects. The Jakarta Stock Exchange Composite Index also rose by 16% in 2016.

In India, the widely discussed demonetisation programme aimed at “widening state coffers and promoting digital payments” is also seen to attract investments and boost the economy significantly.

Be Cautious with 2017

Nevertheless, investors need to be cautious in 2017 with the great ambivalence in the global markets. The strong greenback continues to put significant pressure on weakening Asian currencies. Key financial leaders are gradually starting to align with the Federal Reserve’s decision and think that three interest rate hikes in 2017 are “very reasonable”, although it could actually create large fluctuations in the bond markets and exacerbate the capital flight issue in many emerging markets.

Several political risks continue to plague Asian countries – Jakarta’s riots, Malaysia’s 1MDB saga and China’s tension with US.

Any of these events could create fluctuations in the local economy and a ripple effect that spreads globally. Hence it might be wise to monitor the markets closely and focus on the emerging economies that are relatively more stable in their performance amidst this global uncertainty.

 

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