Markets

Lloyds’ private bank tells wealthy clients that emerging markets are hot

Emerging markets are "THE asset class to watch" according to Lloyds Bank's private banking division, which advises wealthy clients on how to invest.

In a review of its ten-year investment strategy, Lloyds said that emerging markets such as China, India, Indonesia and Mexico offer investors the "potential to reap higher returns".

It noted that the International Monetary Fund's World Economic Outlook is forecasting a 4.7 per cent boost in GDP this year from emerging economies, compared to the 2.3 per cent expected from industrialised economies.

Read more: Lloyds' private bank boots bonds as it funnels wealthy's cash into hedge fund-type investments

However, Lloyds emphasised that countries must be considered on a case-by-case basis to identify the best blend of potential risk and return.

Mexico

“Mexico presents a waiting game for investors," said Lloyds Bank Private Banking's chief investment officer Markus Stadlmann.

"As both fiscal and monetary policy begin to ease, domestic demand could recover later this year.”

He added that through the "Trump effect" could "make or break Mexico", luck may well swing the country's way.

Lloyds believes that the odds of the US president retracting the North American Free Trade Agreement (Nafta) are "rapidly subsiding" as he shifts his ire to China, and a deal could be signed before mid-year.

On the flip side, Mexico is holding a general election this summer and with the leftist candidate surging, its government could be subject to political change.

Argentina

Further south of Mexico, Lloyds has pinpointed Argentina as an interesting opportunity due to its more politically stable environment since President Macri was given a vote of confidence in the mid-term elections of October 2017.

Though the country has seen slow growth for a number of years, Lloyds noted Macri has enacted reforms to attract business and increase consumer spending power. The central bank has also embarked on a battle to lower inflation by increasing interest rates.

Indonesia

Though China is seeing an industrial recovery, Lloyds named its archipelago neighbour Indonesia as one of the more interesting economies which could benefit from this.

China's transition away from heavy industry may hit Indonesia short term, as the demand for raw materials falls, but there may be other opportunities.

"Indonesia has reduced its reliance on commodities by around 20 per cent over the last eight years. Meanwhile the government has brought expenditure under control and is borrowing less, which is lowering its debt burden," said Stadlmann.

"This may create some long-term buying opportunities for investors."

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India

Meanwhile in India, the picture is very different but "equally eye-catching". Prime Minister Modi is pushing through reforms which are making Indian equities more appealing, and the government released a "mildly expansionary 2018-2019 budget".

“Overall loan growth in India has picked up meaningfully, and consumer loan growth in particular is accelerating at a double-digit pace," noted Stadlmann.

"Commercial vehicle sales are now accelerating robustly and manufacturing production has picked up noticeably. In our multi-asset portfolios, we keep an overweight position in Indian equities."

But not Turkey

According to Lloyds, Turkey's "spiralling inflation makes it one to avoid".

Though the country has historically been popular with emerging markets investors, Stadlmann said the economy was overheating and markets are in freefall – while the incumbent government is "overstimulating growth with disregard for inflation".

Lloyds said it expected to see the lira plummet in value, leading to a spike in the cost of servicing external debt which would also hit equities and undermine returns on bonds.

Read more:UK investors are bullish on emerging markets as only gold ranks higher, says Franklin Templeton research

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