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Emerging markets: country and sector selection is key

Emerging marketsIf US, Chinese or European growth plummets, emerging markets will suffer. But even if the US economy grows faster than the rest of the world and the Fed looks to raise rates, it won’t bode well for emerging markets assets either, says Sergey Dergachev, lead emerging markets debt manager at Union Investments.

A lot depends on the path of the US dollar. Last year it was not that volatile. “But a key risk will be strong and quick US dollar appreciation and the risk of more renminbi depreciation and its second-round effect for emerging markets currencies,” he tells Funds Europe.

Choosing which emerging market and which sector to invest in is key.

According to Dergachev, 2019 saw positive support from monetary policy feedback – but there were many geopolitical hotspots such as Hong Kong and Latin America.

“It will be crucial to determine where country-specific risks will either ebb down or where there is potential that they will critically affect institutions and a country’s credit metrics. So, careful country and corporate selection will matter a lot,” he says.

For Michael Kruger, investment analyst at Morningstar Investment Management South Africa, there are competitive advantages in several technology and consumer-related companies. According to him, they have the potential to extend their market positions even in a challenging environment.

Chetan Sehgal, a portfolio management director at Franklin Templeton, is of a similar mind. “Technology is expected to become a key driver of global growth, especially in emerging markets where companies have been using innovation and technology to leapfrog and disrupt traditional business models,” he says.

Increasing internet use in emerging markets is also accelerating opportunities for efficiencies, cost savings and the general ease of doing business, Sehgal adds.

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