With the possibility of at least a slight breather in Ukraine, emerging markets are up a little bit.
So, should things calm down between Russia and its neighbor, what’s ahead for emerging markets as a whole?
Gerardo Rodriguez, Senior Investment Strategist at Blackrock and former official at Mexico’s Ministry of Finance, says emerging markets cannot be lumped together, especially when a situation like what’s happening in Ukraine occurs.
Rodriguez says that while many emerging markets enjoyed growth thanks in part to China entering the global economy over the past several years, those days may be coming to an end. Now what will matter is how well countries reformed themselves over the past two decades. Weaknesses were exposed when the then-Federal Reserve Chairman Ben Bernanke first suggested the Fed would taper its bond-buying monetary stimulus that had helped keep rates low in the US. One of the first things to happen was a sell-off in emerging markets as returns in those countries had trouble attracting investors given their risks.
“There are not many countries that have been doing their homework in terms of gaining reform momentum,” says Rodriguez, “[or] thinking of the things that would increase GDP growth potential for the future. This deterioration is actually what has captured the market’s attention when the Fed changed the narrative into the taper discussion.”
Countries such as Argentina and Venezuela then saw their structural problems come to a head, says Rodriguez, and he believes they will have to change. Nonetheless, some emerging economies may provide higher returns to investors ahead.
“You have many different stories within the [emerging markets] context,” says Rodriguez. “Therefore, from an investment perspective, there are some interesting opportunities for alpha.”
Countries that can deliver higher returns are the ones willing to push ahead with economic reforms, according to Rodriguez. “You need to think about those countries willing to take their medicine,” he says, pointing out Indonesia and India as two examples.
“You also want to get involved in countries with much more predictable governance on the economic and political side,” says Rodriguez, “like South Korea, for example.”
Rodriguez sees optimism for Mexico, the country whose government he once served. “What we're seeing in Mexico is a once-in-a-generation change which will basically transform the economy for the medium-term,” says Rodriguez. Yet Mexico’s equity markets are still relatively underdeveloped, he believes. Eventually, the market sectors’ high level of concentration in a few companies will loosen up as the country goes through more reforms.
“If you want to bet on place,” says Rodriguez, “Mexico's a good bet.”
To see the full interview with Gerardo Rodriguez on what’s next for emerging markets, watch the video above.