Take care against emerging risks

Emerging market assets, especially commodities and financials, hold promise, but in addition to concerns about global recovery, there are four risk factors so investors should be cautious.

PHILIP POOLE is the global head of macro and investment strategy at HSBC Global Asset Management

Commodity-related investments, including metals should remain well supported in this flush liquidity environment, where currency debasement via quantitative easing remains a concern. Both processes should support gold and precious metals demand more generally. Many emerging markets currency valuations look fundamentally cheap, and with developed market yields likely to remain low, the carry pick-up also continues to look attractive.

On a quant basis, there is little value in the long end of any of the developed world government bond markets, and exposure to the two- and five-year segments is preferable. The outlook for credit appears positive and corporate credit spreads have room to tighten further as investors stretch for yield. Corporate balance sheets in developed and emerging markets are in relatively good shape.

Russia looks cheap in emerging market equity terms, relative both to its own trading history and to peers, while India is stretched on both counts. China and Brazil appear more fairly valued. In any market correction, downside in emerging market equity and fixed income is likely to be limited by the structural desire of underweight developed market asset managers to gain exposure.

Higher emerging markets inflation is a key risk and investors should get some protection via inflation-linkers while it is still affordable. In contrast, developed market inflation-linkers look rich.