Virtually, the whole Latin American continent is currently plagued by all kinds of challenges, reaching from political, to the deep economic problems in Argentina.
Brazil’s economy hoovers around one percent in GDP growth, and despite the size of the country, this growth rate is not impressive for an Emerging Market country.
For Latin America, the outlook remains sluggish and it will surprise me if 2020 becomes the year when investors significantly increase their allocation towards Latin America.
I expect a different demand for funds investing in sub-Saharan African countries, where some of these allocations, however, belong to the “Frontier Markets” category, and therefore represent a bigger risk than Emerging Markets investments.
For allocations into these funds, a further challenge is that the investment volume the funds can absorb is relatively modest compared to the overall global investment volume.
I assess that Asian Emerging Market countries will take the focus in 2020 if investors gain extra appetite for Emerging Markets, especially in the fixed income market.
China has been particularly interesting since 2017, when the Bond Connect trading channel opened up for international investors who want to invest in domestic bonds in China.
Since then, foreign investors’ holdings of domestic Chinese bonds have risen steadily and Chinese government bonds have been included in several global bond indices.
The latter development is a partial explanation why foreign investors have increased their allocations to China’s bond market.
A number of investment funds tracks the indices that have included Chinese bonds in the portfolio, and therefore many investment funds choose to follow that allocation into China.
Based on my own impression from investment funds and other investors, it is precisely that they primarily follow changes in global indices.
By that, I also say that there is still only a limited group of investors who are actively looking into the Chinese bond markets in a larger style.
This will also be the approach at the start of 2020, but crucial to a generally increased appetite will be how the Beijing government works with the country’s pressured growth rates.
If they follow the reform path with even more easing for private households and the business sector, then this will probably find positive resonance among international investors.
Conversely, growth measures based on public investment infrastructure will not encourage investors to increase allocations in China’s direction.
I could well imagine yet another economic compromise that includes a bit of everything, though it will not move the majority of investors to take further action.
However, the investors who are actively working with their returns in 2020 and beyond, may encounter the market for “Asset Backed Securities” in China.
In China, the market works as in all other countries, and the volume in China is the world’s second largest after the American market.
Also, as in the US, the underlying assets can be car financing for private consumers. Credit card debt financing is also increasing, which is quite interesting.
In Asia, the Asean countries is a classic destination for investors with an appetite for allocations to Emerging Markets.
I expect the favored countries to be those with fiscal freedom to support domestic growth, which is the compensation for weak global growth.
One should not underestimate the positive effect for all Asean countries if the US-China trade war ends, as all countries in the region have a dependence on China’s growth.
But despite this, my assessment is that an increasing share of new economic growth will have a domestic focus.
A good example is how the International Monetary Fund (IMF) recently encouraged Singapore to step up growth initiatives, with the recommendation that Singapore should build more infrastructure and expand the elderly care/healthcare sector.
Precisely why Emerging Markets countries that have the financial strength to move their own economy will, in my opinion, be the preferred countries to invest in – the Philippines is one of them.