Relative political stability, economic resurgence in some of the larger nations and the emergence of reform-oriented governments make emerging economies an attractive investment target for next year, according to Swiss investment bank Credit Suisse.
In a media briefing on its 2017 investment outlook, Credit Suisse's global head of investment strategy, Nannette Hechler Fayd'herbe, said emerging markets (EM) have evolved to become more resilient to international developments over the last decade, such as the political uncertainty gripping Europe and U.S. President-elect Donald Trump's plans to hit the reset button on U.S. trade policies.
"(EMs) have a lower exposure to an export-driven (growth) model than is generally assumed. They have a better, balanced-type of growth model," said Hechler Fayd'herbe, adding a large majority of EM countries have only a third of their gross domestic product (GDP) that is dependent on international trade.
Large EMs in Asia and Latin America, for example, have the advantage of a large domestic consumer base, many of whom are just entering the middle class, which allows them to look inwards for growth.
The world's two most populous countries, China and India, are still growing at twice the pace of global growth; recently in its second quarter of fiscal 2016, India saw its economy grow by 7.3 percent annually, whereas China's most recent factory activity data showed continued expansion in its manufacturing and services sectors.
Credit Suisse highlighted three notable investment themes for 2017 where emerging markets looked attractive.
Local and hard currency-denominated debt
The investment bank said it was looking for sources of yield in countries where the political and economic risks were reasonable, and added there was a need to continue diversifying fixed income investments, particularly in markets where corporate credit still played a big part.
"We particularly find emerging market debt in hard currency, but also in local currency, as an important part of investment strategy for next year," Hechler Fayd'herbe said, adding the bank held a favorable view toward Latin America as it offered higher yields than EMs elsewhere.
Hard currencies are usually those that are relatively stable and widely accepted for financial transactions such as the U.S. dollar, euro, yen and the British pound.
In emerging Asia, Credit Suisse prefers Indonesia. Current bid-yield on the 10-year Indonesian government bond note is 8.07 percent versus a 2.43 percent bid-yield on the 10-year Treasury note.
Indonesia is considered one of the stronger-performing EMs by some analysts, as President Joko Widodo continues with a series of reforms; in his two years in office, he has abolished gasoline subsidies and launched a tax amnesty program to recover tax revenues.
Chinese equities look attractive
Stock markets have had a volatile year, driven by unexpected political outcomes which were not well priced-in and thus resulted in periods of volatility.
Chinese markets started the year with a massive sell-off, but have somewhat recovered since, following a series of government reforms to stabilize the bifurcate economy and make China's financial markets more open to international investors.
The composite, however, is still down 8.25 percent year-to-date, compared to the broad MSCI Asia Pacific ex-Japan index's 5.50 percent gain for the same period.
Chinese equities as well as Hong Kong stocks are expected to lead regional equities in 2017, according to Credit Suisse, due a recovery in earnings, attractive valuations and buoyant liquidity that will accelerate south/north-bound inflows.
Adding to further north-south inflows will be the launch of the Shenzhen-Hong Kong Stock Connect, which is set to formally open on Dec. 5 and would allow Chinese investors to buy Hong Kong shares and vice versa.
Mainland sectors that look attractive include technology, insurance and other high-growth sectors as China gradually turns to its domestic economy and services sector to drive growth.
Exporters are also expected to benefit from a gradual, expected depreciation of the yuan, according to Credit Suisse.
Playing the oil trade in the FX market
Following OPEC's Wednesday announcement that it would reduce global oil supply by 1.2 million barrels a day, oil prices have soared as much as 16 percent. Credit Suisse believes one way to play the oil trade would be to look at energy-related currencies, particularly the Norwegian krone and the Russian ruble.
The ruble is also set to be one of the few currencies that could fight against outright dollar strength, according to Heng Koon How, senior foreign exchange investment strategist at the bank. In early November, the World Bank said Russia's economic outlook had improved and its economy was set to grow by 1.5 percent in 2017.
Overall, the Swiss investment bank believes financial markets will likely remain challenging in 2017 and the central economic forecast is for global GDP growth to accelerate to 3.4 percent from 3.1 percent in the current year.