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Emerging market (EM) real estate has enjoyed a strong rally since October 2018 on the back of a dovish turn from major central banks. EM real estate equities, measured by either the FTSE EPRA/NAREIT EM or the MSCI EM Real Estate, outperformed EM equities (MSCI EM) and developed market equities (MSCI World) in the six months up to the end of April.
EMs face a more benign economic environment than 2018. First, the Fed is expected to maintain the federal funds rate at the current level (if not lower) for the rest of 2019. This represents a significant adjustment from its tightening bias last year, as core PCE inflation remains persistently below its 2% target. Second, the US economy continues its sequential slowdown, as suggested by the deceleration in both survey data (e.g. manufacturing and services PMIs) and hard data (e.g. personal consumption and non-residential business investment), supporting a continued dovish stance. That said, the US economy does not face an imminent recession that would cause a selloff in EM assets. Third, growth in EMs and the Eurozone is tentatively stabilising after significant disappointment in 2018, boosting investor sentiment and financial conditions in those regions. Fourth, countries such as Mexico, the Philippines and Indonesia have high real interest rates as a result of monetary tightening in 2018 and lower inflation. Those countries have room for monetary easing that would benefit local assets. All the above factors have led to a lower risk premium for EM assets and lower government bond yields (Chart 1) - benefitting EM real estate assets.
Source: Bloomberg Barclays EM Indices, Bloomberg as of May 3, 2019
That said, political uncertainties could disrupt such a benign economic environment. They could also have implications on intra-EM country allocation. Brinkmanship continues in the Sino-US trade talks, with the US abruptly raising the tariff rate from 10% to 25% in May on $200bn Chinese exports, after several months of negotiations. The timing and scale of fiscal savings from the Brazilian pension reform remain unclear. Cyril Ramaphosa remains President of South Africa, but the ANC’s 5% drop in support since the 2014 election is clouding the outlook for reform. In Thailand, the incumbent military-backed party has formed a weak coalition while Prayuth Chan-o-cha is set to remain Prime Minister. Political uncertainties have led us to downgrade our views on several countries.
*The publication reflects asset performance up to April 30, 2019, and macro events and data releases up to May 10, 2019, unless indicated otherwise.
The information contained herein is obtained from sources believed by City of London Investment Management Company Limited to be accurate and reliable. No responsibility can be accepted under any circumstances for errors of fact or omission. Any forward looking statements or forecasts are based on assumptions and actual results may vary from any such statements or forecasts.
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