Cairo - Almost everybody loves Russia and wants to get as
far away as possible from Turkey.
That just about sums up investor sentiment toward the
developing economies of Europe, the Middle East and Africa. Money managers’ top
calls for next year are centred on markets where the political climate is
improving and assets are less vulnerable to external shocks arising from higher
US borrowing costs and President-elect Donald Trump’s policy announcements.
Within politically stable markets, investors are looking
for cheaper valuations and an ability to pace a rally in commodity prices.
Currencies
UBS Group says Russia’s ruble will offer the best-carry
trade opportunity in EMEA over the next 12 months, with a potential return of
26 percent. Relatively high interest rates and recovering oil prices will drive
the currency’s appreciation, the Zurich-based investment bank says. JPMorgan
Chase & Company expects the Czech koruna to be resilient to global risk and
outperform its peers due to support from a strong balance of payments. Morgan
Stanley bets on a rebound in eastern European currencies, especially Poland’s
zloty, if political risks in Europe don’t deepen. Most people warned against
buying Turkish assets. James Lord, a market strategist at Morgan Stanley, is
sticking to his bearish view of the lira, even though it appears to be cheap.
He says the lack of focus on productivity growth as wages rise will continue to
undermine the currency’s competitiveness.
Stocks
NN Investment Partners sees the Russian equity market as
an “obvious candidate.” Higher oil prices, a stronger ruble and easing
inflation should encourage the country’s central bank to loosen monetary
policy, said Nathan Griffiths, who helps manage about $750 million. Griffiths
also expects the FTSE/JSE All Share Index in Johannesburg to rally, benefiting
from curbs on President Jacob Zuma’s power. Aviva Investors considers small-cap
companies in developing markets attractive, especially in retail, health and
industrials. Ian Pizer, the London-based head of investment strategy and
co-fund manager at Aviva, says heavy domestic ownership gives those companies a
buffer. Capital Economics Ltd. says banks in central and Eastern Europe, the
Middle East and Africa are improving their financial ratios, though lenders in
Russia and Turkey are still in the doldrums.
Bonds
Deutsche Bank expects growing stability in domestic
politics to benefit Russian and South African bonds. Russia should gain from an
improving relationship with the US, while South Africa will probably avoid a
debt downgrade, the German lender says. Denmark-based Global Evolution Fonds favours
Egypt’s local bonds, after yields rose to almost 20 percent and the currency’s
value halved following its free float. Global Evolution recommends Nigeria to
investors who can make a “leap of faith” as he expects political stability to
improve next year and the government to make a second attempt to float its
currency. Ghana’s peaceful transfer of power after its 2016 presidential
election, and increased oil production make its local-currency notes and
Eurobonds attractive, says Stephen Bailey-Smith, who helps manage $4.2 billion
at Global Evolution. Neuberger Berman Europe Ltd. says Turkey’s
foreign-currency bonds are cheap as it deems domestic risks to be fully priced
in.
BLOOMBERG