World Bank estimates that emerging markets will grow at least 3 per cent faster than developed economies over the next three years are too conservative, Ashmore Group believes.
Head of research at the emerging markets boutique Jan Dehn says EM growth is returning to its former glory having bottomed in 2015 when they “only” grew twice as fast as developed economies.
During those previous five years, the EM growth premium to developed markets declined following the massive rotation away from emerging into developed markets as a result of quantitative easing.
Yet he says most EM countries escaped relatively unscathed. High yield corporate default rates were lower than those for US high yield companies and the number – and size – of sovereign defaults were also limited.
Dehn points out many EM countries saw currency falls and strong reform programmes, which led to improved levels of competitiveness and an acceleration of the region due to strong exports – much of which has likely not be included in World Bank projections.
He says EMs will enjoy a “gentle upswing” in commodity prices, while falling real interest rates will support growth as central banks take a more hawkish stance to kerb extremely high levels.
Dehn adds: “Needless to say, the return to stronger growth in EM is important. Above all, it will give global investors the option to put money into EM as an alternative to the overbought QE markets.
“Returns in EM look promising. History, while no guide to the future, shows a strong positive correlation exists between the EM growth premium and EM currencies. As such, we think EM local markets could do particularly well.”