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Geoffrey Dennis, Independent Emerging Markets Commentator says emerging markets remain reasonably placed despite rising US bond yields and uncertainty over the Federal Reserve. He remains positive on Korea and Taiwan, backed by the ongoing AI and technology rally, though he expects slower gains and higher volatility.
Geoffrey Dennis, Independent Emerging Markets Commentator, expects emerging markets to remain reasonably well placed despite the risk of higher US bond yields and continued uncertainty around the Federal Reserve. He remains positive on Korea and Taiwan, backed by his view that the US technology and artificial intelligence (AI) rally has further to run, although he expects the pace to slow and volatility to rise.
For India, Dennis sees the return of sustained foreign institutional investor (FII) flows as the key catalyst. While the rupee has stabilised and relative valuations have improved, he says continued IPO supply could constrain the market and that, for now, “it’s all down to FII money.”
This is an edited transcript of the interview.
Q: The war continues to simmer on, US bond yields are surging, gold has made a comeback, and tech earnings continue to remain strong. So, assess the emerging market turf for us as things stand.
A: Emerging markets continued to do pretty well. They've come off their high in mid-June, but then the S&P and the Nasdaq have done the same thing, so no particular major surprise there. And obviously, as your viewers will know, you've seen a big sell-off in Korea and Taiwan, which have been driving the emerging markets this year. In fact, strip those two out, and EM has not done particularly well this year.
Now, given the background we've got here, which I think personally is the danger that bond yields go higher, there's certainly, as we all know, a big focus on the size of the US debt, at $40 trillion, and uncertainty about exactly what the Fed is going to do, and how they're going to do it, and how they're going to explain it. So, there are a lot of reasons that are giving you a little bit of a pause here.
On the other hand, that's translating into a slightly weaker dollar, and that's usually good for EM. So, I think EM looks reasonably placed unless the US stock market were to fall sharply from here, and I'm not sure that's going to happen.
Q: The risks evenly balanced when it comes to emerging markets for now, but within the basket, are you less excited about Korea and Taiwan after the recent underperformance or correction that we've seen? Is India making a comeback? Is it moving up the pecking order?
A: I am not particularly negative about Korea, Taiwan. Obviously, they had a big sell-off. They're starting to rally a little bit, and I have a lot of faith here in the technology rally in the US and the AI rally. I think it goes further. And clearly, that will be the major driver of Korea and Taiwan. So, I would still be fairly heavily invested in Korea and Taiwan.
I think the challenge in India, and we seem to be talking about this, even though I've not been on the show for a while, for many, many months, is finding the catalyst. And the obvious catalyst in India is going to be the return of foreign FII money. And as far as I can see, that's still not really happening.
The rupee has stabilised, which is helpful. The dollar's gone down; that's useful. The oil price has come back a little bit, but oil at, you know, $80 to $90 (per barrel) for Brent is still a major challenge for all these big oil importers. And so, I think it's just hard to see where the catalyst is for India.
India is down 9% in dollars this year. China is down 9%. Aside from Korea, Taiwan, I'm keeping an eye on Latin America, where you've seen a big sell-off recently. Both Brazil and Mexico, I think, look reasonably well placed. And that's kind of how I'd see it at the moment.
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