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How to Distinguish the Right Emerging Markets to Invest in

“Emerging markets assets can give investors exposure to different benefits than the developed markets, but it is very important to recognise that not all emerging markets are the same. Investors must not just look at emerging markets in an overall portfolio but look carefully for the ones that are more resilient and able to grow in a global environment that is becoming more difficult,” advises Rachel Ziemba, Senior Director of Research, Emerging Markets, Roubini Global Economics

Ziemba is a speaker at the marcus evans Middle East Investors Summit 2015 taking place in Dubai, UAE, 15 – 16 November.

What should investors look for in emerging markets?

The three main questions investors need to ask are: is the country saving more than it is spending? Does it have the funds to finance the investment that it needs? And what sectors of the economy are perhaps over indebted?

Investors must look carefully at both the global and domestic environments to best select which countries are the most attractive. Some resilient countries are exposed to the import demand of the US which is going to be one of the strongest growing developed economies. This includes countries like Mexico and some of the East Asian countries like Taiwan and Singapore.

Another attribute is relevantly low inflation, so countries that are able to grow without meaningful inflation and needing to hike interest rates. Many emerging markets like Turkey, South Africa and Brazil have supply constraints like insufficient power, which cap investment and consumption or sharp increases in lending. We look for countries that have a domestic demand that can grow, so we carefully look at frontier markets that have not developed that demand yet, but have the capacity to do so.

What are some current global trends affecting emerging markets?

One of the most important ones is the economic transition that is underway in China. China has been on a turbulent transition to more consumption-driven growth which means lower growth rates, as well as different drivers of growth. The shift to more service driven growth is good for China and the global economy as it implies more sustainable growth. It will cause disruptions for some countries that provided more capital goods and commodities to China.

Another current trend is the healing US economy and rise of the US dollar. There has been a lot of monetary liquidity that has been pumped into the system in the last several years that has resulted in growth of the US economic labour market gains and it is an economy that will be growing above potential and closing the output gap very slowly in coming years. We expect rate hikes will gradually come in 2016.

Europe and Japan, two other big blocks of global output will be focused more on trying to export their way out of their problem by using quantitative easing to help reflate their economies. That means weakening their currencies and that Europe is not going to be as big of a demand centre as it has been in the last decade which is a challenge for emerging markets that are tied into the European demand chain.

How do these trends affect the Middle East?

It is important again to differentiate across countries. The global trends mentioned, rising US rates, China that is looking to export more, in addition to lower oil prices for the foreseeable future, are all challenging for Middle Eastern markets including the Gulf countries. We think the Gulf is better positioned to weather this transition rather than their less well equipped North African peers which have fewer savings.

Middle Eastern countries are beneficiaries of Chinese dumping of products like steel on their markets which dampens inflation which may be good for consumers, but not good for producers. We are also watching closely the likely re-entrance of Iran into global oil markets and also its role as an importer. There will be some countries that can benefit from this demand and other countries that will struggle to maintain market share.

There is less leverage in local systems particularly in the UAE than there was five or six years ago, but even as oil revenues have gone down, investment returns going into many governments have remained relatively robust.