Emerging markets may have reached the end of the road for investors, according to financial analysts.
Falling commodity prices and a strong US dollar are stressing many formerly booming economies and if they cannot overcome some serious challenges in the year ahead they are likely to falter.
This is the opinion of Kames Capital’s chief investment officer Stephen Jones.
He argues fears of a US interest rate rise spooked the markets and triggered a sell-off from which emerging markets have failed to recover.
“Emerging markets are taking a battering from outside forces like falling commodity prices and a strengthening dollar,” he said.
Shift to Europe
“India was one of the few emerging markets to prosper last year as it is one of the few in the category that imports rather than exports energy. A change of government and new ideas also freshened up the economy.”
Jones argues that many other emerging markets in South America and the Asia Pacific face a tougher outlook.
“Europe and Japan look like the equities for investors this year rather than emerging markets which look tired and weary,” he said. “Europe looks particularly interesting and could generate some healthy returns now the European Central Bank is applying financial stimulus.
“We’re seeing many investors shift their focus away from emerging markets in favour of European equities.”
Meanwhile, another emerging market posted some disappointing GDP statistics.
Russia’s growth felt the pinch from falling oil prices and economic sanctions over The Ukraine crisis to contract by 1.9%.
“It’s could have been worse and we were expecting it to be so,” said Craig Botham, emerging markets economist at investment house Schroders.
Russian output falling
“The markets are expecting output to weaken and the final numbers to show the Russian economy is shrinking at a faster rate by the end of the year.”
He explained that the figures were based on a flash estimate rather than final figures.
“It’s possible that industrial output was bolstered rather than hampered by a weak ruble, making Russian exports more attractive to foreign buyers,” said Botham. “However, internal consumption by businesses and consumers is falling.”
Botham also took the view that action to raise interest rates by the central bank has stabilised the ruble, but the economy looks unlikely to repeat last year’s performance.
“The economy is still in a difficult place and is certainly not on the road to recovery yet or any time soon in our view,” said Botham.