Improving market fundamentals and strengthening economic growth have drawn greater allocations to emerging market (EM) assets, according to Michael Biggs, macro strategist and investment manager at Swiss asset management company GAM.
GAM favours India and Indonesia, among other countries, for investment opportunities, Mr. Biggs says in an interview with Asia Asset Management. He notes that the current account deficits in these countries have narrowed considerably since 2013. And if credit growth picks up, it would help to further boost their already strong economic growth.
However, there are potential external risks for EMs. This includes the possibility of the US Federal Reserve reducing its securities holdings too quickly, which could be a potential “monetary policy error” as it may result in a spike in interest rates, and a slowdown in US and global growth, according to Mr. Biggs.
“We think the biggest risks to EM remain a sharper slowdown in China than we anticipate, a strong USD [US dollar], or perhaps a monetary policy error in the developed world,” he says.
Slower growth in China would mean weaker export growth in the other Asian EMs, which would translate into a poorer current account balance, or slower economic growth.
Weakening growth in China would also weigh on commodity prices and hurt commodity producers such as Indonesia and Malaysia.
“If these risks occur, EM assets will struggle, but we believe the sound fundamentals in our favoured countries will leave them less vulnerable to these shocks than in the past,” Mr. Biggs says.
