As a stellar year for emerging market assets winds to a close, Lazard Asset Management is betting on further gains in 2018, albeit at a slower pace.
Economic growth will propel corporate earnings and support local currencies, although richer valuations mean investors are unlikely to notch the same level of gains they saw this year, according to Denise Simon and James Donald, money managers at Lazard, which has $66.6 billion of emerging market assets. They forecast domestic bonds will deliver a high-single-digit return and equities will climb 10% to 15%. Those asset classes rose about 13% and 33%, respectively, this year.
Developing-nation stocks and currencies have posted their best return since 2009 on the back of investor confidence that drove appetite for riskier bets, as well as faster economic growth and a less volatile political backdrop. In equities, the rally reduced the valuation discount for emerging markets relative to developed markets to 25% from 35%. Gains could reduce the gap to as low as 20% in 2018, according to Mr. Donald.
"We just had a very powerful year, and it is hard to see another year like this," Mr. Donald said.
The money managers see Argentina's local notes as attractive. They believe President Mauricio Macri will continue his push to overhaul the economy, curb inflation and narrow the fiscal deficit. Brazil's local rates offer value, as the yield curve seems too steep. Russian fixed-income assets are poised for gains as inflation slows.
In equities, Lazard is finding companies with attractive valuations in the financial and telecommunications sectors. In China, Lazard is overweight in two of its three emerging-market equities strategies. The one focused on price growth has considerable exposure to technology companies and the core strategy, which tracks closer to benchmark indexes, naturally has a larger China weight. Only the value-oriented strategy isn't overweight the country, since Mr. Donald says a lot of these stocks are expensive.
Mr. Donald sees frontier equity markets offering good opportunities as economic development takes hold. Members of the Lazard team visited companies in Vietnam and Pakistan this year to assess investments. He also says Nigeria looks attractive.
"Frontier is a very good long-term opportunity for investors that can assume the risk," he said.