Emerging Markets

Emerging markets a mess, but need a 'country by country' look

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The rout in global commodities prices has claimed a number of formerly high-flying developing economies — and their asset markets — as victims. Despite the widespread carnage, there are still some regions that may be relatively attractive to investors.

To be certain, emerging market investments aren't for the faint of heart. The prospect of tighter monetary policy from the U.S. Federal Reserve, coupled with China's economic slump, have prompted investors to pull cash out of developing economies at breakneck speed. By some estimates, net emerging market outflows totaled more than $940 million in the 13 months to the end of July, while EM-linked exchange-traded funds lost at least $19 billion thus far this year.

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The end of the "commodities supercycle" — and the world of lower energy prices it's helped to create — has produced a gallery of troubled economies on which investors have soured. Turkey, where trade links to major oil economies like Russia, Iraq and Iran have been a drag on its economy, has seen its lira plunge to record lows recently.

Still, the turmoil also has created some opportunities, which should be evaluated on their merits, according to Alex Wolf, emerging markets economist at Standard Life Investments, which holds roughly $393 billion under management.

"Some countries are clear beneficiaries, whether through increased wealth effects and a real consumption boost, or through reducing subsidies and reallocating fiscal spending to more efficient uses," he said in an interview.

"However, it's most important to take a country-by-country look, Wolf added.

'The best emerging markets story'

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A report published in October by ratings agency Moody's Investors Service pointed to "diverging resilience" across various emerging markets, underscoring how some countries are better positioned to weather the storm. Amid the "prolonged period of emerging market risk aversion," Moody's said countries like Turkey, Brazil and South Africa are at risk.

India, however, is a different story. The more than $2 trillion economy "is less exposed to global risks because of its more resilient economic growth and the impact of positive policy reform momentum," the ratings agency said.

Large investors seem to agree. At a conference last month, Eric Stein, a vice president and portfolio manager at Eaton Vance Asset Management, a firm which has nearly $300 billion in assets, called India "the best emerging markets story" of 2015. That sentiment was echoed by Societe Generale analysts, who estimated last week that Bombay's benchmark stocks would rally into 2016.

Although the International Monetary Fund cut India's growth estimates to 7.3 percent from 7.5 percent last month, Standard Life's Wolf thinks the country will "continue to improve cyclically."

India has already seen "improvement in production, investment and foreign direct investment that are pointing to continued improvement. This in addition to ongoing structural improvements leads us to be positive on India's outlook," Wolf said.

He added that India has tamed many of the structural imbalances that were at one time considered intractable, including once runaway inflation, a current account deficit that now sits below 2 percent of gross domestic product and its fiscal deficit.

"Granted there are still many impediments to faster growth but we think India is moving in the right direction and has strong fundamentals," said Wolf.

Across the frontier markets, Standard Life sees glimmers of hope in Vietnam. There are true signs of resilience and global export market share is on the rise, he said.

"Vietnam has had strong export performance in a period of very weak external demand. In addition, the conclusion of the Trans-Pacific Partnership will be very positive for Vietnam, both from a trade perspective but also from the forced structural reforms that are part of the deal."