NN Investment Sees 10% Gain for Emerging Market Stocks in 2018

  • Emerging market equities seen outperforming EM debt: NN IP
  • India, Argentina, Indonesia among most favored markets

Emerging-market stocks should rally at least 10 percent in 2018 and are a better investment than developing-nation bonds, according to NN Investment Partners.

Valentijn van Nieuwenhuijzen, the chief investment officer at The Hague-based asset manager, which oversees $288 billion, said he has increased the share of EM equities in portfolios in recent months relative to debt. Emerging-market bonds are already fairly valued and next year’s returns will be between just 2 and 4 percent, he said.

Emerging market investors have enjoyed strong returns this year with a 33 percent gain in the MSCI Emerging Market stock index and a near 8 percent total return in the Bloomberg Barclays Emerging Markets Hard Currency Aggregate bond index. Cash continues to flow into the securities with U.S.-listed emerging market ETF assets alone rising by $1.07 billion this month and $42.6 billion this year.

“It starts for us with a fairly solid conviction on a good performance in emerging-market equities next year, then we translate that in portfolios into a overweight compared to benchmark,” said van Nieuwenhuijzen, speaking in an interview in London. “At this point, we are more aggressively positioned in emerging-market equities than we are in emerging-market debt.”

Here are a selection of his views on the outlook for emerging-market investments:

Why do you prefer EM stocks to bonds?

Equities are less stretched from a valuation perspective, they are still relatively cheap and seem to benefit from credit growth. The corporate sector is still managing to grow profits without getting into any type of bottlenecks, and we think investors with a longer-term perspective are still fairly light in their allocations to emerging-markets.

What is your view on EM debt?

The story is also very good on the debt side but yields are fairly low already. Spreads over government bonds are at the lower end of historical ranges, and if U.S. yields rise, that will hurt total returns.

How do you think EM debt will perform versus DM debt?

You still get a nice yield pick-up and much of the fundamentals and sentiment remain supportive, so emerging-market bonds should outperform developed-market equivalents. We are still overweight EM debt compared to DM sovereigns, which is the asset class we like least among our allocations.

Which markets do you like the most?

We like markets where we get a sense of structural reforms taking place, such as India, Argentina and Indonesia. Here, there is good growth, a feeling that governance is good and getting better, and some degree of social reform. Tactically we also like Russia, not so much to do with structural reforms or governance, but because of the cheapness of the market and the recovery in oil prices.

What countries do you not like as an investment case?

We don’t like markets where the situation is less stable, such as in Turkey, South Africa, and Malaysia. Political instability is our main concern and there are no reforms and even a deterioration in the policy set-up in those countries.

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