The restriction of global central bank liquidity forecast at the beginning of 2014, has left emerging market investors more cautious about near future political risks that may be on the horizon if foreign direct investment in core infrastructure and market development declines. Review of 2013 shows that some developing markets outperformed emerging markets as well. This places uncertainty where there was only very recently, a strong prospectus for emerging market liquidity. The drop in fixed asset prices for precious metals, and particularly gold, also signals a return to primary market activity.
Markets under the Lens in 2014
U.S. Federal Reserve Policy
Tapering policies instituted by the U.S. Federal Reserve in respect to the country’s recent quantitative easing policies that afforded the issuance of ‘cheap money’ by the U.S. Treasury will shift back to a market focused economy. The national debt outlook, the impetus for those easing policies, also prompted volume purchase of bond debt by the government. The impact of U.S. monetary policy on developing economies will be significant say economists, as American investors transfer assets to contracts with higher exposure (i.e. futures, options, stocks and equity contracts). This will have varied effect on emerging market securities.
Recap on Emerging Markets 2013
As competition for FDI and securities investment heats up, the MSCI Emerging Markets Index is expected to be below initial analyst forecasts for the long-term, with noticeable division between the BRIC countries. In the near future, India and Brazil are predicted to continue to underperform Russia and China, yet both of the latter will also be underperforming in comparison to the growth of the past several years.
The emerging bonds market reported underperformance in its third year since 1998. Equities contracts, including exchange traded funds (ETFs), also devolved for the second year in a row. Increased political risk predicted in emerging economies that are now being called the ‘Fragile Five’, Brazil, India, Indonesia, South Africa, and Turkey is expected to leave the door open for intense competition for foreign investment.
Analysis is Key in 2014
With the market no longer safe for broad analysis of emerging market assets, investors must take more time in assessing the value of those offerings if they want to reduce risk. Stocks are projected to be the highest earning segment of the market in the forthcoming year. Investors will want to conduct adequate research on listings prior to making a decision.
Equity investors will also come out on top, as major central banks, such as the the European Central Bank and Bank of Japan will continue to funnel liquidity into the markets. The equity markets around the world have been on the increase in response to the overall positive economic outlook. In January 2014, the MSCI world equity index (.MIWD00000PUS) responsible for tracking shares in 45 countries, increased by 0.1 percent, reaching its highest level in five-and-a-half years.
With the shift back to a market focused economy, global indicators that retraction of foreign investor interest in emerging market asset classes might be met with listing of emerging market securities on major markets. Cross-exchange trading of emerging securities listed on the world’s developed market exchanges is predicted to continue at a moderate pace.
Stability is the key word for China in 2014 say financial analysts and economists, as investors are expected to remain focused on the country’s restructuring from an investment-led, emergent economy attracting foreign liquidity, to one reflecting developed markets. The near future of China’s consumption-led will be a key driver of global growth. Higher incomes are partly responsible for this fact, as the markets see the effect of consumer stocks in retail and other core segments.
Luxury consumers in Asia and the emerging markets continue to fuel expansion for the world’s most recognized brands. Retailers such as Cartier, Gucci, Lancôme, Judith Leiber, Jo Malone (owned by Estee Lauder), Sephora,and Tiffany are projected to report higher sales figures in 2014, with luxury brand manufacturers such as Keenpac moving into the Asian landscape.
Elections in Indonesia and India this year point to political uncertainty and market volatility, yet the economy of these two countries continues to grow significantly, setting the pace for structural reforms. Similarly, in Thailand, political reforms are impacting governance. The result of this transformation will be new investment opportunities for FDI, with stocks remaining slow performers.
Investment targets such as consumer banks and insurance companies in these countries evidences that rising consumption and retirement savings have created a low risk environment for investors seeking moderate growth. Sustainable industries such as alternative energy technologies are also a safe bet, with oil distribution continuing as a growth sector.
New Emerging Market Leaders
In 2014, other regions will also be seeing major transformations. Africa, Eastern Europe, and the Middle East are all seeing a return to growth. The United Arab Emirates and Qatar will join the MSCI Emerging Markets Index in May 2014. In addition, Mexico is also showing its potential, as the neighboring trade partner of the U.S. advances as an energy, manufacturing, and business services powerhouse.
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Tim Capper writes and reports on Financial Markets with particular focus on Emerging Luxury Markets