To Goldman, Developed World Looks Riskier Than Erdogan, Zuma

by Ben Bartenstein   April 13, 2017, 4:00 AM CDT

  • Twenty-two of 24 emerging-market currencies are up this year

  • Growth forecasts hint at rally in developing-nation stocks

Geopolitical risks may be on the rise in emerging markets, but investors from Goldman Sachs to BlackRock aren’t much bothered by them. Developed nations, on the other hand, are giving them the jitters.

Take France: far-right presidential candidate Marine Le Pen and the Communist-backed Jean-Luc Melenchon are both polling in the top four less than two weeks before the first-round vote; the ripple effect of the U.K.’s vote to leave the EU is threatening to undermine financial stability in Europe; and Donald Trump’s recent fixation on Syrian military strikes could spring a war.

“The global wave of populism looks more scary for developed markets, whereas we in EM are quite used to it,” said Viktor Szabo, who oversees $10 billion at Aberdeen Asset Management Plc. “We know how to price it, but good luck properly pricing Le Pen or Melenchon!”

Outside of South Africa, where the president is facing a no-confidence vote, and Turkey, where a referendum may institutionalize a de facto one-man rule, developing nations present fewer event risks this year than traditionally stabler developed nations, according to Kristin Ceva, who manages $8.7 billion at Payden & Rygel Investment Counsel. She favors high-yielding debt from Ghana, Argentina and Sri Lanka.

“You’ve got better growth, better current accounts and simply better news,” Ceva said by phone from Los Angeles. It doesn’t help that payouts on developed-nation debt is so low, she said, noting that roughly 60 percent of their debt yields 1 percent or less.

Investors are particularly charmed by Latin America, where economists project a pickup in growth for the first time in three years on the back of technocratic reforms. More clients are discussing trips to the region in 2017 than any other time in the past two years, said Sheila Patel, chief executive officer at Goldman Sachs Asset Management International.

“There are a number of investors who say emerging markets feel more stable than developed markets,” Patel said on Bloomberg TV last week. “They’re looking for the pickup in yield that EM offers and they’re saying that in many cases, EM is decoupling from DM.”

BlackRock recommends bonds in Brazil -- on declining inflation -- and Mexico, where focus on a border wall is “overdone,” Rick Rieder, the chief investment officer of global fixed income, told Bloomberg TV last week.

Despite a 43 percent surge in MSCI’s developing-nation stock index since last January, the gauge could climb at least 5 percent higher, spurred by Mexican equities, which are already near a 6-month high, Credit Suisse technical analysts David Sneddon and Christopher Hine wrote in a note last week. They’ve also turned bullish on Indonesian stocks, which recently hit an all-time high.

Sneddon and Hine may be on the right track. The gross domestic product growth spread between emerging-market and developed-market nations will widen in 2017 to the most in three years, according to forecasts tracked by Bloomberg. Historically, wider spreads have coincided with surges in developing-nation equities, including the rally from 2003 to 2007. Exchange-traded funds in the U.S. seem to have taken note, with more money pouring into the iShares Core MSCI Emerging Markets ETF than anywhere else.

Business sentiment in developing nations also remains supportive, with PMI indicators in aggregate more positive in March than in the prior month. Turkish manufacturing PMI climbed into expansion territory for the first time in 13 months, ignoring any consternation over next week’s referendum, while India’s rose to 52.5, the most since its demonetization effort last November.

In fact, improving growth and external balance sheets across emerging markets are even acting as a shield against U.S. rate pressures amid upbeat commentary from Fed Chair Janet Yellen, Morgan Stanley strategists led by Gordian Kemen wrote in a note Tuesday.

Case in point: the cost investors pay for equity protection on the S&P 500 Index spiked to a 10-month high on Wednesday, according to Credit Suisse’s Fear Barometer Index.