A recovery in emerging-market growth will be pushed back amid rising interest rates and declines in developing-nations currencies, according to Pacific Investment Management Co.
“There is a real possibility that this vicious cycle of rate adjustments in EM coupled with currency weakness will further postpone EM growth recovery,” Masha Gordon, who oversees more than $2.5 billion in assets as London-based head of emerging-market equities at Pimco, said by e-mail today.
About $2.9 trillion has been erased from equities worldwide this year after manufacturing gauges in the U.S. and China, the world’s biggest economies, signaled a slowdown at a time when the Federal Reserve is cutting stimulus. A slump in developing-nations currencies from the Turkish lira to the South African rand spurred central banks to raise interest rates.
The International Monetary Fund predicts that the growth advantage of emerging markets over advanced economies will shrink this year to the smallest since 2001. The Washington-based group kept its expansion forecast for developing countries this year at 5.1 percent on Jan. 21, while raising the outlook for advanced economies to 2.2 percent, from the 2 percent estimated in October.
The MSCI Emerging Markets Index of equities has slumped 8.4 percent this year, the worst start on record. The retreat dragged down the gauge’s valuation to 11 times reported earnings, a 40 percent discount versus the MSCI World Index, the widest gap since October 2008, data compiled by Bloomberg show.
Investors should focus on “undervalued” companies with “premium profitability,” Gordon said.
Currencies of developing nations rebounded today, with the rand gaining 1.5 percent against the dollar and Turkey’s lira strengthening 1.3 percent. Both have weakened more than 4.5 percent versus the dollar this year.
The selloff “has been currency-led as EM policy makers found themselves on the back foot with regards to policy adjustments commensurate with the world of higher rates,” Gordon said.