Global asset managers are looking to US equities and emerging markets to offer value in the new year despite ongoing geopolitical ructions. 

BlackRock chief investment officer Belinda Boa says a broadening spread in equity valuations within emerging markets and developed markets is tipped to become even more pronounced this year.

"Emerging markets are a very important part of generating the returns that investors are going to need from their portfolios.

Indonesia's financial sector is one area of opportunity she highlights.

"We're preferential on Indonesia, given the reforms we've seen there. It's also interesting, given it's faced very big currency moves this year, but the central bank is very set on supporting the economy, and we see value in the financial sector in particular," Boa says.

However, she concedes Indonesia's general elections on 17 April could add to volatility. "There is always a risk premium associated with emerging markets because of the volatility and uncertainty," she says.

Boa suggests emerging markets are in a better position today than they were through the taper tantrum of 2013, when the Federal Reserve was reducing the amount of money it fed into the economy.

She believes emerging markets have "more room to move" in adjusting fiscal policy than most developed economies: "I think there is an argument [for emerging markets investing], and it's not just in valuations but also structurally, they're in better shape."

emerging markets

The gap between developed and emerging market equity prices is tipped to increase further. Source: BlackRock

While acknowledging the challenges faced by emerging markets, including a stronger US dollar, high oil prices, rising US interest rates and the ongoing rift in US-China trade relations, "we see those headwinds decreasing in 2019," Boa says.

Looking to the US

In a year marred by geopolitical turmoil – the US-China trade war, European elections, and intensifying uncertainty over Britain’s split from the EU – BlackRock's bullish outlook on US equities is somewhat contrarian.

Numerous economists and fund managers have steered clear of the US, UK and other developed markets, preferring to build cash buffers.

However, there have been some positive developments on the US front at the start of the new year.

The US and China resume trade talks this week, and Wall Street has surged to close at its highest level in two weeks after a strong jobs report and assurances from US Federal Reserve chairman Jerome Powell that the central bank would be patient and flexible in steering the course of interest rates.

BlackRock likes American and British healthcare stocks, but Boa urges caution given hedge funds have been increasingly active within the sector, creating more risk for retail investors.
Another wealth manager that sees opportunity in the US is Platinum Asset Management.

Platinum chief executive Andrew Clifford disputes claims that the US is overvalued and sees value in several sectors.

Speaking at the Morningstar Individual Investor Conference in October, Clifford highlighted several out-of-favour companies across the auto, energy and materials, industrials and Asian consumer sectors, where he sees strong prospects over the next three to five years.

Clifford also sees value in emerging markets, particularly those with strong technology sectors, such as China and South Korea.

Morningstar Investment Management portfolio manager Bryce Anderson has highlighted emerging market economies broadly – specifically Taiwan and South Korea, where technology is the main game. Korean electronics giant Samsung is a shining example.
Japan too stands out as a value play, Anderson says.

"In a world where global equity markets are reasonably expensive, Japan's probably trading on a reasonably fair [price-to-earnings] multiple, which in the current environment is pretty good," he said.

In particular, changes in the way Japanese companies are run have resulted in a greater proportion of profits benefiting shareholders instead of other interests.

Euro woes on radar

British Prime Minister Theresa May is striving to persuade her opponents in parliament to back her Brexit deal, warning the UK will be in “uncharted territory” if they reject her plan in a key vote this month.

Boa, however, says the market has already priced all Brexit scenarios. "We believe the odds of a no-deal Brexit are low, but all eventualities are priced into markets quite well already."

Other flashpoints in Europe are weighing on markets, says Boa, including Italy’s debt crisis, anti-government protests France, and more broadly signs of further fragmentation, where several countries have zero growth.

However, she says pockets of opportunity still exist, notably in industrials because they are less exposed to changing export regulations.

"There is now little movement that the EU can make … but you can still see some tactical opportunities in Europe."