Economic reform challenges in China and Brazil have led emerging markets money managers to focus even more than in the past on domestic issues in the countries they're targeting for investment.
“What's happened in previous years can be summarized as the China factor, where one market has been the single driver of an asset class,” said Gerardo Rodriguez, managing director, portfolio manager and head of emerging markets multiasset strategies at BlackRock Inc., New York. “Even with a broad view of the asset class, China was driving the whole thing. Now the story of emerging markets is changing, with multiple factors affecting it. Divergence is now the name of the game.”
Chief among the domestic factors that will affect emerging markets going forward, sources said, are:
• the degree of government interference in a country's economy;
• a market's dependence on commodities as a main economic driver;
• a country's monetary policy; and
• the impact of a strong U.S. dollar on local currency.
Because of the variables that have to be assessed, “it's an ideal environment for an active emerging markets manager,” Mr. Rodriguez added. “It is now an asset class in which domestic drivers are much more relevant than in the past.”
The focus on reform in China as well as in Brazil and Russia has dovetailed with managers now veering away from being heavily dependent on markets whose wealth is centered on commodity exports like oil and gas. Instead, managers are looking closely at the domestic political climate in each market as well as the effect of a strong U.S. dollar and the potential for currency risk.
George Hoguet, managing director and global investment strategist, investment solutions group, State Street Global Advisors, Boston, said the recent sell-off in emerging markets was driven by geopolitical rather than economic concerns. “The sell-off isn't just reflective of the (Federal Reserve) or Chinese risk or Mideast risk. It's reflecting a lack of legitimacy of political leadership, of weak leadership in many emerging markets.”
For some market veterans, that change in focus could be called the “China syndrome,” reflecting their view that the stated goal now of Chinese policymakers — of shifting China's economy from a singular focus on export-led growth to one powered more by domestic consumption — will mark the start of a broader emerging markets trend.