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Regina Chi is vice-president and portfolio manager at AGF Investments Inc.

There was a time, back in the 1990s, when emerging markets all seemed to be working from the same playbook. But these days, many EM countries are busy carving out their own path to the future while rewriting an outdated script.

Still, the perception that EM is one homogeneous asset class persists despite its evolution as a diverse group of countries with different opportunities, as well as risks and drivers. EM economies are evolving and many are stepping up the value-chain, each with their own economic cycle, political realities and market structure.

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And while a number of macroeconomic forces sideswiped EM markets in 2018, many of those headwinds are now shifting to tailwinds. Not only are valuations in EM favourable, but growth in gross domestic product is poised to outstrip that of developed markets in 2019. The upshot? There are lots of reasons for optimism as we look to EM this year. Yet, investors would do well to pick their spots, balancing the opportunities against the risks while investing in disparate EM countries.

The EM that was

Back in the 1980s and 1990s, EM countries were largely commodity-based economies, often with large account deficits – meaning they owed debt in U.S. and European currencies, making them particularly vulnerable to external macroeconomic policies.

Early investors, who were initially intrigued by rapid rates of industrialization and soaring growth rates, later got spooked, caught in the cross-fire of a string of financial crises beginning with the Mexican Peso Crisis in 1994 brought on by the Mexican government’s devaluation of the peso, followed by the East Asian financial crisis in 1997 and the Taper Tantrum in 2013, when the U.S. Federal Reserve began to reduce the amount of money it was injecting into the economy. These shocks set off a negative chain reaction in the global economy, yet ultimately proved to be the catalyst for sweeping reforms in many EM countries. India, for example, began opening up large parts of its economy to foreign investment. Meanwhile, significant fiscal and monetary reforms were implemented in Asia, culminating in China’s entry into the World Trade Organization in 2001.

Rise of the new EM

Fast-forward to 2019 and the picture takes on a remarkably different and nuanced hue. Infrastructure-driven sectors, such as industrials, materials and energy, are less important drivers of performance, while many EM economies have shifted into a new generation of growth based on technology and innovation, with a focus on higher-value goods and services. The recent explosion of China’s technological firepower, for example, coupled with its new strategic plan, Made in China 2025, has given rise to a designed-in-China model that some call “Chinnovation.” Meanwhile, other countries and regions like those in Latin American and South Africa are endowed with natural resources and still in the early stage of their development.

Reform is continuing. Many countries are now issuing bonds in their own currencies, for example, while slashing debt loads and current account deficits. Many have also pursued other structural reforms to enhance fiscal discipline and shield their economies from external shocks, while bolstering markets for the future. Yet, other countries continue to be plagued by precarious economies and institutions with persistent structural imbalances.

By the numbers

A comparison of sector weightings on the MSCI Emerging Markets Index – representing 24 countries – tells the story of EMs’ remarkable transformation between 2008 and 2018. In 2008, for example, information technology accounted for 10 per cent of the index, versus 27 per cent last year; energy represented 19 per cent in 2008, compared with 7 per cent last year; and materials have fallen in their weighting to 8 per cent from 16 per cent a decade ago.

emerging markets growth

2019 GDP growth forecasts

Asia (excluding Japan)

India

7.5%

Philippines

6.6%

China

6.3%

Indonesia

5.3%

Malaysia

4.9%

Thailand

3.8%

S. Korea

2.8%

Taiwan

2.4%

North Africa/Middle East

Egypt

5.1%

Morocco

3.7%

U.A.E.

3.2%

Qatar

2.8%

Sub-Saharan Africa

Nigeria

2.9%

Angola

2.3%

S. Africa

2.0%

Latin America

Peru

3.8%

Chile

3.5%

Colombia

3.1%

Brazil

2.5%

Mexico

2.2%

Argentina

1.9%

Eastern Europe

Romania

3.6%

Poland

3.5%

Turkey

3.5%

Czech. Rep.

3.0%

Greece

2.0%

Russia

1.7%

JOHN SOPINSKI/THE GLOBE AND MAI

sOURCE: AGF Investments Inc.

emerging markets growth

2019 GDP growth forecasts

Asia (excluding Japan)

India

7.5%

Philippines

6.6%

China

6.3%

Indonesia

5.3%

Malaysia

4.9%

Thailand

3.8%

S. Korea

2.8%

Taiwan

2.4%

North Africa/Middle East

Egypt

5.1%

Morocco

3.7%

U.A.E.

3.2%

Qatar

2.8%

Sub-Saharan Africa

Nigeria

2.9%

Angola

2.3%

S. Africa

2.0%

Latin America

Peru

3.8%

Chile

3.5%

Colombia

3.1%

Brazil

2.5%

Mexico

2.2%

Argentina

1.9%

Eastern Europe

Romania

3.6%

Poland

3.5%

Turkey

3.5%

Czech. Rep.

3.0%

Greece

2.0%

Russia

1.7%

JOHN SOPINSKI/THE GLOBE AND MAI

sOURCE: AGF Investments Inc.

emerging markets growth

2019 GDP growth forecasts

Asia (excluding Japan)

India

7.5%

Philippines

6.6%

China

6.3%

Indonesia

5.3%

Malaysia

4.9%

Thailand

3.8%

S. Korea

2.8%

Taiwan

2.4%

North Africa/Middle East

Egypt

5.1%

Morocco

3.7%

U.A.E.

3.2%

Qatar

2.8%

Sub-Saharan Africa

Nigeria

2.9%

Angola

2.3%

S. Africa

2.0%

Latin America

Peru

3.8%

Chile

3.5%

Colombia

3.1%

Brazil

2.5%

Mexico

2.2%

Argentina

1.9%

Eastern Europe

Romania

3.6%

Poland

3.5%

Turkey

3.5%

Czech. Rep.

3.0%

Greece

2.0%

Russia

1.7%

JOHN SOPINSKI/THE GLOBE AND MAI, sOURCE: AGF Investments Inc.

Perhaps the most significant gauge of the current heterogeneity in EM, however, is the dramatic variance in stock-market returns between countries. Over five years, between the end of January, 2014, and as of Jan. 31, 2019, India’s market returns were up 79 per cent, compared with 53 per cent for Brazil and a decline of 10 per cent in Turkey. Growth-rate forecasts for 2019 are also widely divergent: 2.8 per cent in South Africa, 5.1 per cent in Egypt, and 7.5 per cent in India, according to Bloomberg data.

Three countries worth looking at in 2019

China

Hopes have risen of an imminent U.S.-China deal on trade tariffs that, if it materializes, will substantially reduce business uncertainty. While the U.S.-China rivalry will continue to persist in the background, especially in the tech sector, a deal will largely eliminate one of the main macro risks that scared EM investors in 2018. Meanwhile, Beijing’s efforts to stabilize and stimulate China’s economic growth are likely to gain traction over the coming months. The government expects 2019 GDP growth of between 6 per cent and 6.5 per cent, compared to last year’s rate of 6.6 per cent, Bloomberg data shows.

Czech Republic

The Czech Republic has been a key destination for capital and has attracted high volumes of foreign direct investment since the 1990s. This is due to its strategic geographical location in Europe, which is accessible to both Eastern and Western markets. According to Bloomberg, GDP growth was 3 per cent in 2018 with contained inflation at 2.1 per cent.

United Arab Emirates

The UAE is an attractive country for investors after suffering the fallout from steep declines in oil prices over several years. Heading into 2019, not only have oil prices rebounded, but the UAE is making significant steps to diversify its economy. Under Abu Dhabi 2021, a three-year stimulus program, the country is introducing a number of initiatives to enhance the country’s global competitiveness and economic diversity. The country’s GDP is expected to grow 3.2 per cent in 2019, compared with less than 1 per cent last year.

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The views expressed in this article are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.

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