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Time to rethink EM political risk discount, says AB's Harting

Time to rethink EM political risk discount, says AB's Harting

It may be time to rethink the ‘political risk’ discount embedded in emerging stocks, given the dramatic political upheavals that are rocking major developed countries.

That is according to AllianceBernstein’s Morgan Harting, who runs several mixed-asset funds at the firm, including the AB SICAV I-Emer Markets Multi-Asset fund.

Citywire + rated Harting, who runs the fund alongside + rated Marco Santamaria, said there are still plenty of opportunities in emerging market stocks, once the macroeconomic risk has been distilled.

'Equity investors can focus on high-growth companies that are positioned to profit from domestically driven growth drivers,' he said.

'Some of the most profitable and compelling secular growth technology companies in the world today are in China, where companies command an ever-growing share of spending by the rapidly growing middle class.'

Harting said 'attractively-valued stocks' include industrial commodities companies in Russia, as well as Korean financial institutions.

Asserting independence

Harting said developing countries are asserting their economic independence, with improving economic growth in many developing economies being driven by domestic trends and not the US.

'Russia and Brazil are shifting from recession toward recovery. In our view, accelerating growth in more EM economies can help offset the impact of China’s deceleration.

'Inflation has largely been tamed across the developing world in countries such as Brazil. Poor performers such as Venezuela are the exception, real interest rates are low enough to be a stimulating factor across many developing countries.'

Harting said external balances have adjusted significantly and, as a result, EM economies have become less reliant on foreign capital.

'EMs have become less vulnerable to rising interest rates in developed markets. Concerns about a stronger dollar may be overdone.

'For many export-oriented EM companies, a weaker local currency versus the dollar should support profitability, as their products and services become more competitive abroad.'

Fiscal prudence returns to LatAm

Elsewhere, Harting said political reform is also helping to shape fixed income markets in regions such as Latin America.

'In LatAm, a crackdown on corruption is unfolding in countries like Argentina and Brazil. After rampant spending and graft in the commodity-fuelled boom years, today’s more business-friendly governments are advancing fiscally sustainable policies that favour growth.

'With inflation becoming increasingly contained in some countries, many hard-currency bonds in the region look attractive,' Harting added.

Harting said EMs will face plenty of challenges in the year to come, and believes it will take time to understand the impact of changing US policies on the developing world.

'Given the uncertainties, a flexible cross-asset approach can be rewarding. We think the key to constructing a resilient EM portfolio is to combine equities, debt, and currencies, with stringent security selection.

'There are certainly real challenges to be reckoned with but, by getting a grip on the risks, we think investors can gain conviction to stay in EM through challenging times.'

The AB SICAV I-Emer Markets Multi-Asset fund returned 3.73% over the three years to the end of December 2016. This compares with a 3.08% rise by its Citywire-assigned benchmark, the LCI MSCI EM USD/JP Morgan EMBI Global (60:40), over the same time period.

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