Emerging markets are expected to be a major winner in the ongoing race for resource sovereignty, according to Pictet Wealth Management’s Kelvin Tay.
Pictet Wealth Management is bullish on emerging markets (EM) in the long term due to their role in the current macroeconomic environment, particularly with the growing desire by governments to prioritize energy security and access to key commodities amid geopolitical uncertainty, trade barriers, and other factors. In the 14th edition of the bank’s Horizon global outlook report entitled “The race for resource sovereignty,” both large and medium-sized EM are at the core of this theme, including in the artificial intelligence (AI) build-out.
“Geopolitics are basically pushing EM into a very new upcycle,” said Kelvin Tay, Pictet Wealth Management’s Asia chief investment officer, at a recent media briefing.
Four key drivers
Tay notes that there are four key drivers that are moving EM back into the centre of the global investment landscape.
First, a significant share of the AI ecosystem is designed, manufactured, or assembled in EM, especially in North Asia. Second. resource and supply chain resilience often means diversifying relationships to a broader set of countries within EM. Third, EM have healthy macroeconomic fundamentals, including lower levels of debt, stronger external balances, and improved central bank credibility. Fourth, local currency bond markets have expanded to provide a more stable source of funding, which reduces vulnerabilities from FX movements.
“In the past, EM were basically just very high-growth, cheap labour, young population, and just supplying the usual natural resources like oil, gas, coal. Today, emerging markets are a little bit more advanced,” Tay elaborated.
“We have China dominating the production and refining of the rare earths. We have Taiwan and Korea – two major economies in Asia – basically dominating the hardware, chip, memory manufacturing, as well. So the emerging markets have actually come quite a long way from the last ten years.”
Asset class forecasts
Overall, Pictet forecasts that global equities will deliver annualized returns of 6.8% over the next 10 years, led by Asia ex-Japan at 8.3%, compared with 6.9% for the US. Within bonds, the 10-year return projections for US Treasuries is 5%, reflecting higher assumptions for central bank policy rates and 10-year term premia. In FX, it remains bearish on the US dollar but now assumes moderately less depreciation over the next decade.
“If you put all that together, EM is actually becoming a very attractive investment universe,” Tay added.
“In the past, if you invest in emerging markets, you need China to really outperform, to pull the emerging markets up, but today, you don’t need that. This year, on a year-to-date basis, China is negative, but the emerging markets have actually been pulled up by Korea and Taiwan.”
