2018, Changes in Foreign Investment in APAC
New Opportunities in Emerging Markets
Emerging markets provide a number of unique opportunities for forward-thinking investors. From property investments in developing countries through to digital and energy assets, the world is changing before our eyes and it’s important to keep up. While foreign fund firms continue to invest heavily in emerging markets, the landscape is almost completely unrecognisable from a few years ago. 2018 has brought a number of key changes, with some markets continuing to bring record returns and others vulnerable to changing global conditions.
While a lot of investors got excited about the synchronised economic growth that defined much of 2017, the situation has changed dramatically in 2018 as the result of a strong US dollar and rising signs of emerging market weakness. A healthy greenback has exposed unsustainable debt levels in many countries and industry sectors, with both the level and structure of debt causing concern among investors. You just have to look at the situation in Turkey to see how it can all go horribly wrong.
A strong US dollar has made things very difficult for countries who borrowed heavily, including Turkey and Argentina. With a rising US dollar comes a corresponding drop in the value of emerging market currencies, which in turn leads to rising interest rates in developing markets as central banks try to defend themselves. This cycle of debt, currency devaluation, and recession is hard to avoid for nations with a substantial amount of debt. Now more than ever, countries with a current account surplus are doing much better than those with a current account deficit.
The other dominant trend over the last few years has been the divergence of equity and commodity prices in emerging markets. Gone are the days when equity performance rode alongside energy prices, with infrastructure-driven sectors which are dependent on energy resources becoming less important than consumer sectors such as information technology. While equity and commodity performance is still running parallel, there is a significant gap in their cycle due to a fall in energy and materials sector weights.
The strong US dollar and reduced importance of energy markets has helped to highlight some parts of the world over others. Consumption-based markets continue to provide strong performance, especially Asian markets that are strongly involved in the technology sector. Countries with a large population and emerging middle class are providing the best opportunities, especially if they’re not exposed to falling oil prices. The technological changes taking place in China continue to provide opportunities, with the young workforce of India and emerging tech-sector of the Asia Pacific region and Israel also creating some excitement.