US deal done, will emerging markets soar?

CNBC

With the removal of a major market overhang following a deal to avoid a U.S. debt default, investors have begun to wonder: are emerging markets set to soar?

"We expect the news to sustain the re-pricing of risk assets that got underway in September," Tim Condon, head of research for Asia at ING, said. "We now think emerging market equity will outperform developed market equity in the current quarter."

(Read more: Markets cry freedom from debt ceiling prison )

"The 12 percent loss during the May 21-August 30 market turmoil leaves more to claw back compared with developed market equity, which lost 3 percent," he added, referring to the performance of the MSCI Emerging Markets Index and MSCI World Index. Condon noted that his top picks include Indonesia, the Philippines, Thailand and South Korea.

U.S. Senate and House leaders passed a bill to end the fiscal impasse late on Wednesday, hours before the government's borrowing authority was due to expire. The deal will fund the government until January 15 and raise the debt limit through to February 7. However, this means there is still a risk of another shutdown early next year.

Indonesia's Jakarta Composite (Jakarta Stock Exchange: .JKSE-ID) rose 0.8 percent, while Thailand's SET (The Stock Exchange of Thailand: .SETI-TH)and China's Shanghai Composite (Shanghai Stock Exchange: .SSEC-SZ) gained around 0.7 and 0.6 percent, respectively, in the morning trading session on Thursday.

(Read more: Why emerging markets look good amid the shutdown )

Tim Riddell, head of global markets research, Asia, at ANZ says while the current scenario is "supportive" for risk appetite, investors are unlikely to be "gung ho" due to this uncertainty. Nevertheless, he expects both Asian and U.S. markets to continue their uptrend for the remainder of the year, barring any new political developments.

One point of comfort is that under the agreement to reopen the government, the House and Senate have been directed to hold talks and produce a 10-year tax and spending blueprint by December 13, he said.

Kelly Teoh, market strategist at IG says the bigger picture for investors now is that U.S. monetary stimulus is here to stay for a while longer, which will mean more liquidity trickling into emerging markets.

(Read more: Forget tapering, emerging markets need to watch the wages )

Market watchers expect the Federal Reserve will delay plans to wind down its $85 billion-a-month asset-purchase program to 2014 following the 16-day partial government shutdown and political stalemate on the debt ceiling. Before the political debacle, most economists expected the central bank would begin tapering in December 2013.

"It will be risk-on, the speed and velocity of that will slowly increase. The emerging market Asian space will be a key beneficiary, despite their structural issues," Teoh said.

- CNBC's Ansuya Harjani; Follow her on Twitter @Ansuya_H



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