Near-Term Challenges, Longer Term Optimism | Capital Group

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Investment Insights

September 2015

Near-Term Challenges, Longer Term Optimism

“Overall, many emerging markets economies still have a very long way to go and in many countries reform progress has been stalled for years. But there are a few areas where tangible reform progress is visible.”

—  Rob Neithart

Robert H. Neithart Portfolio Manager Los Angeles office 29 years of experience (as of 12/31/16)

Clearly, some emerging economies face major near-term challenges. Still, it’s also fair to say that — compared to the past — emerging economies are broadly in better shape. If, for example, interest rate hikes by the U.S. Federal Reserve are gradual (as is widely anticipated), many economies and markets appear well-positioned to show greater resilience than they have in past periods of higher U.S. Treasury yields.

Compared to the 1990s and early 2000s, when several emerging economies experienced crises, foreign exchange reserves are generally substantial, and currency pegs are less common. Likewise, in many instances government debt-to-GDP ratios are lower, and where debt loads are heavier, in some cases it’s arguably a natural consequence of maturing bond markets.

India and other net importers of energy have made progress in reducing their current account deficits, which could make their currencies less vulnerable to substantial weakening against the dollar. Meanwhile, a number of central banks appear to have the resources and inclination to support economic growth and bond prices with more accommodative monetary policies, if needed. From an investment perspective, even incremental improvements in economic conditions and stewardship can be supportive of credit fundamentals.

In terms of reform, encouraging progress has been evident in a number of countries. Mexico’s improving credit fundamentals and sound growth prospects have been helped by a slew of reforms in recent years. In 2014, President Enrique Peña Nieto signed into law comprehensive energy sector reforms that should be of profound benefit to future economic activity. In India, Prime Minister Narendra Modi has been pursuing an ambitious reform agenda since his election in May 2014. Already, Indian capital markets restrictions have been loosened, subsidies on gasoline and diesel have been eased and fuel taxes imposed. 

Emerging Economies Are Diverging Economic Growth (2015 Gross Domestic Product and Percentage Point Change Since 2013)

Source: International Monetary Fund. 2015 figures are full-year projections.


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