In an economically and financially interconnected world like the one we live in, every action has effects on other countries. And if it is the Central Bank of the United States that moves, it can only be otherwise.
Now that the eurozone enjoys a newfound appeal to investors, i emerging markets they are back the number one concern, apart from Greece.
In fact, the approaching monetary tightening by the Fed and the appreciable appreciation of the dollar exposes emerging countries to two main risks.
1. A reversal of financial flows. In recent years, emerging countries have been able to enjoy a large amount of liquidity from developed countries which, according to the latest BIS figures, has exceeded its pre-crisis peak.
2. The increase in the debt burden. The depreciation of the national currency has increased the weight of debt issued in a foreign currency (for example in dollars) and can undermine the ability of a company, but also that of a country, to repay its debt and therefore incur a potential default. There is a risk that the occurrence of one of these two events could lead to a financial crisis, and it is useless to hide it.
In the March 2015 asset allocation that we propose to you, we at AdviseOnly have maintained a neutral opinion on the shares of Emerging Countries which, both in the Express Portfolios and in the Premium Portfolios, represent a fair share of the equity exposure basically for two reasons.
1. There are no alarming signs: for years there has been talk of a crisis in Emerging Countries and in particular of a brutal landing of the Chinese economy (hard landing) but, at least for now, none of this is on the horizon.
. Emerging Countries continue to have better growth dynamics (GDP forecasts, population growth and per capita income) than Developed Countries;
. debt is lower than that of developed countries from all points of view (governments, companies and financial institutions);
. central banks have more leeway and have accumulated significant foreign currency reserves to defend against excessive exchange rate depreciation;
. on the credit side, the maturity of corporate debt is quite long, the percentage of foreign currency debt remains small in relation to the overall volume and corporate credit is mostly of a domestic nature.
2. They are affordable: in addition to having attractive valuations in absolute value, emerging countries offer a significant additional return (risk premium) compared to developed markets. The current earning yield is 3,5%, up from 1,5% over the past 14 years. Furthermore, this yield also looks attractive compared to the level of financial stress reported by the Emerging Countries Risk Barometer.
In conclusion, the market conditions of Emerging Countries are currently under control and the yields offered by their shares seem to justify our exposure which, overall, remains prudent and highly diversified.
