Why is Indonesia important to China
China, Indonesia and Turkey
After signs of a recovery in the emerging markets (EM) at the beginning of the year, worries about the weakening economy in China, but also in Europe and Japan, frightened emerging market investors. Beyond the negative headlines, however, we are convinced that there are still solid growth opportunities in many regions and asset classes.
Further recovery in 2019?
The past year was no picnic for emerging market investors. Escalating trade tensions between China and the US, higher US interest rates and a stronger US dollar resulted in a painful correction in EM assets, especially stocks.
At the beginning of the year, the capital markets of the emerging markets recovered rapidly after the interest rate hikes by the US Federal Reserve moved a long way off. There was also hope for a solution to the US-China trade conflict. Although the upswing has eased somewhat in recent weeks, we believe the recovery will continue - albeit with increased volatility.
We are also confident about relative valuations and the outlook for corporate earnings. Emerging market stocks are traded at a discount of around a third to papers from developed countries. And although the earnings growth outlook has been revised downwards, it is still 10 percent for emerging market companies - around 2 percent above the global average. In addition, the margins of EM companies are much lower than in the industrialized countries - we suspect there is some catching-up potential here.
Overpriced US dollar could boost emerging markets
The rise in the US dollar in 2018 was a severe blow to the external financing needs of emerging markets. In our opinion, the US currency is now extremely overpriced. A comparison with a trade-weighted currency basket shows that the US dollar has not been so highly valued since the mid-1980s. We believe this trend is unsustainable and could even reverse. That could add further boost to emerging market assets.
Another positive sign: in the past, emerging market companies have often rallied in price when last year's earnings were significantly higher than stock performance. That is also currently the case. So, from a historical perspective, EM stocks could be big returns this year.
Page two - Potentials in China, Indonesia and Turkey
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