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EM Markets “Compelling” Says Ellertson’s Dr Manning

As they always seem to be, Asian markets have been extremely volatile over the past six months.

However, rising trade tensions, which are the result of the USA and China trade war, and political uncertainty in currency markets, have taken their toll on many emerging market exchanges. Yet with markets rising so far in 2019, could the tide finally be turning for EM?

Ellerston Capital’s Dr Mary Manning said there has been three catalysts behind the recent boost to EM markets, including an easing of trade tensions, with could see markets go higher.

“Multiple meetings have already occurred between China and the US with progress being made on deficit reduction and Intellectual Property (IP) protection,” Dr Manning said in a recent note to clients.

“US representatives are slated to travel to China for further negotiations after Chinese New Year and Trump and Xi are rumoured to be meeting in Vietnam in late February.”

For years, whitehouse officials have been concerned with the lack of protection of intellectual property rights for US companies operating in or around China. US President Trump has made the protection of US innovation one of his key focus points. Hence the rising trade tensions and tariffs on Chinese imports.

An unfortunate consequence of the rising ‘tit for tat’ on trade tariffs, however, has hit close to home at some large US companies. Some automotive like General Motors, and technology companies are caught in the middle. More than half of the parts in an Apple Inc iPhone are sourced or created in Asia.

MSCI To Boost China Capital Flow

For ETF investors, a big and important investing milestone came last year with the inclusion of Chinese stocks in major global sharemarket indices, such as those operated by MSCI.

Despite China’s rise to become the next economic superpower, for years it has been difficult for foreign investors to get exposure to the country. However, this year investors will experience a significant change on the issue, with more funds including Chinese mainland shares, Manning says.

“It is important to highlight that at the end of February MSCI will make an announcement about increasing in the A share inclusion factor from 5% to 20%.” 

“The actual change, and therefore passive funds flow, will not occur until May/August 2019, but a positive decision would provide a sentiment boost for the Shanghai Composite Index.”

With markets recently being sold down and trade talks easing, plus more capital on its way, Manning says emerging markets are once again looking favourable for investors.

“Valuations in Asia are very compelling and at the end of last year we started to add selectively to high quality stocks that had been unfairly punished in the 2018 correction.”

Disclosure: At the time of writing, Owen owns shares of Apple Inc.

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