Manulife Asset Management encourages investors in emerging economies to look for new signs of structural reform in 2015 after a recent surge of election activity, according to a new paper, Emerging Markets – Refocusing on Reform.
Authors Paolo Valle and Roberto Sanchez-Dahl, co-heads of the emerging market debt team at Manulife Asset Management, write that a fresh focus on reform could lead to new investment opportunities in the credit and sovereign debt markets of countries like Brazil, India, Indonesia, and Turkey.
2014 has been an unprecedented year for election activity, with more than 22 presidential, congressional and parliamentary elections in emerging markets around the world. The heightened pace of political activity meant that the implementation of economic reforms nearly ground to a halt. However, the authors write, with the elections over, change is in the air.
Valle and Sanchez-Dahl believe 2015 will see renewed focus on the reform agenda of major emerging markets including, India, Indonesia, and Brazil, which are grappling with economic imbalances and material current account deficits. Despite their differences, crucial to their long-term stability will be the way in which each nation meets the challenges of reform in social, labor and fiscal sectors, among others.
In Brazil, Indonesia, Turkey and India, the last 20 years have established a first and second generation of reforms. As their emerging middle classes grow, the challenge will be to implement the next generation of reforms, which include labor laws, education, healthcare, basic services, economic growth, infrastructure and addressing income inequality.
Brazil’s government is keen to tackle reforms in a number of areas, including tax, oil exploration, minimum wage, central bank independence, labor, and the pension system. Turkey is expected to focus on its large current account deficit, employment and pension reform, and its untaxed “informal” economy. India’s reform agenda already appears to have momentum, the authors say, with the Modi government moving in the right direction on tax reform, foreign direct investment, and the reduction or elimination of subsidies, mainly in energy services. Indonesia is likely to focus on rationalizing fuel subsidies, investing in infrastructure, health and education.
“Looking ahead, we believe that structural reforms are likely to bring fresh opportunities for new companies to come to the market, broadening the depth of local credit markets,” Valle and Sanchez-Dahl write.
While the pace of reform may disappoint some, the authors maintain that overall significant investment opportunities remain in this asset class. For example, Manulife Asset Management continues to favor sovereign debt in emerging markets, especially in Mexico. Brazil, with its expanding middle class, also offers numerous opportunities.
In conclusion, Valle and Sanchez-Dahl write: “Importantly, the expectations of the markets together with each country’s ability to implement changes are, in our opinion, what will differentiate many of these countries. That disconnect will likely drive investment opportunities in the short to medium term.”
The report is available at www.ManulifeAM.com.