Investors demand EM companies strengthen balance sheets

Added 9th October 2015

Emerging market instability is sending jitters through the industry and even spooked the US Federal Reserve from raising interest rates in September.

Investors demand EM companies strengthen balance sheets

The latest figures from the International Monetary Fund showed these fears may be warranted. Emerging market companies hold around $3trn in overextended loans that threaten to trigger a sharp credit crunch and capital outflows in economies that have already been bruised by low commodity prices.

Deutsche Asset & Wealth Management noted this week that although emerging economies are still, in aggregate, growing faster than developed economies, investors are increasingly worried about the quality of the growth.

“From 2010 onwards, emerging-market growth has decelerated despite a very high investment rate,” Deutsche AWM said.

“The slowdown may be exacerbated by the lack of structural reforms in many emerging markets during the last decade. The ultra-expansionary monetary policy of the developed economies prompted many investors to invest in emerging markets in part because they offered an interest-rate advantage. In reality, however, this favorable financing environment simply helped emerging markets to veil their growing economic weakness,” the lender said.

Columbia Threadneedle noted this week that emerging economies must focus on creating a domestic demand-driven growth model. It acknowledged that this process of transition would be a slow one, made all the more complicated by the previous cycle of over-investment that has suppressed corporate profitability and left many companies with weak balance sheets.

"We have felt that the diminution in Chinese growth is part of a long-term structural and secular change that needs to be monitored closely."

Ken Leech, Western Asset Management’s CIO said in late September: “We’ve had tremendous anxiety over Chinese growth. Their stock market has come up very precipitously.”

“We have felt that the diminution in Chinese growth is part of a long-term structural and secular change that needs to be monitored closely,” he added.

The long-term case for emerging markets

Columbia Threadneedle noted that investors should never lose sight of the structural growth drivers that have long made emerging markets an attractive area in which to invest and which remain as compelling as ever.  At the centre of these is the rapidly expanding middle class, eager to enjoy a higher standard of living and consume a wider range of goods and services.

“On headline numbers, emerging markets have looked cheap versus developed markets for quite some time, but this was not enough to make a case for the asset class in the face of several years of growth and earnings disappointments. Now, however, we seem finally to be at a point where we can start to build a more compelling case for investing in emerging markets. With yields and currencies offering significant value to foreign fixed-income investors, the emerging asset class now looks much more resilient to higher US interest rates,” Columbia Threadneedle said.

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