Emerging Markets: how to unlock the next wave of returns

The recent increase in stock market volatility raised awareness among investors regarding the vulnerabilities in financial markets created by market complacency and associated with the extended phase of exceptional central bank (CB) monetary stimulus. 

The challenge today is to gauge the risk/return potential of the different asset classes in an evolving scenario, as inflation is gently picking up and CB are trying to lower the excess liquidity. EM seem to be showing that a good amount of strength was built up during the phase of exceptional liquidity, supported by favourable cyclical and structural dynamics. From a cyclical perspective, EM economies continue to benefit from the phase of globally synchronised growth. Sustained global trade, positive commodity price dynamics, and the phase of a soft dollar continue to be tailwinds for many EM. The EM vs DM output growth differential is expected to widen to 3.3% in 2020. The positive aggregate figure, however, masks material regional and country differences: for example, China is now in a more advanced phase of its mini cycle, while Russia and Brazil emerged from recession in 2017.

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