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By Emma Wall | 09-10-2017

Is Trump a threat to emerging markets?

Where can investors can find the best opportunities in the developing world?

Emma Wall: Hello and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall, and I'm joined today by Paul Jackson, head of research for Source ETF.

Hi, Paul.

Paul Jackson: Hi.

Wall: So, we're here today to talk about emerging markets. And I'd like to start with the big question, which is, how much of a threat is President Trump to emerging markets?

Jackson: Well, clearly, I think you have to look at Trump as a potential source of problems. We've seen the effect on Mexico, on the Mexican peso, and recently, his actions to bring production back to the United States. But having said that, I think that the advantages of emerging markets will overcome any potential threat from Trump.

For example, demographics are still much more favorable in emerging markets than in the developed world. Debt ratios are much lower. And within that debt, it is primarily domestic. There is very little foreign debt owed by most of the emerging-market governments.

So, I think that those advantages and cheap valuations will see emerging markets outperforming developed markets once again during 2017. And don't forget, during the fourth quarter, during December, particularly on the debt side, emerging markets still outperformed even with the election of Trump. So, with that threat there, the debt markets still outperformed developed markets.

Wall: So, it's fair to say that you are bullish on emerging markets. Perhaps if we could drill down a little into those markets, you think are going to do well in 2017, starting with debt, where are the greatest investment opportunities?

Jackson: For me, I think, you always need to go to the places that other people don't want to go, so where you get the best valuations. So, one fantastic example that nobody really would take seriously is Venezuelan government debt. In U.S. dollars, at the moment, you can get a yield of more than 22%. Back in 2016 at one stage that was 36%. So, it's already come a long way, but I would look for that to fall to maybe 15% during 2017. If that happens, you're looking at a full year return in U.S. dollars of more than 50%.

Other opportunities in emerging markets, I think, still the Brazilian debt market with a yield in U.S. dollars of between 5% and 6% and a local currency yield above 11% at the 10-year level. I think that is still an attractive opportunity. And in Europe, I think Turkey offers good prospects with yields that are similar to what I just quoted for Brazil.

Wall: If we're looking then at the equities side, because it is important to have a diversified portfolio, where are you seeing the greatest opportunities within those stock markets?

Jackson: Once again, I think, as with debt, I would take a diversified approach. But if you're looking for some specific ideas, I think China has been a forgotten market. People were burned perhaps quite badly. It frightened a lot of people. And I think the valuations when you look with a P/E ratio below 10, it is, I think, an attractive market. Perhaps you can get it a little more cheaply in the Hong Kong market.

But also, looking at other markets, once again, Turkey has got similar sorts of valuation ratios, a P/E below 10. The market has been hurt quite badly, as has the currency. So I suspect that will be a good opportunity for 2017. And if you want to get a little more exotic, looking at Africa, where over the long-term, I think, the greatest opportunities exist, there I think the Kenyan Stock Market is at quite an interesting valuation point with a P/E ratio below 10 and a yield which is almost as high as the P/E ratio. So, those will be my three picks.

Wall: Plenty of fantastic opportunities, although we should probably caveat it. It won't be a smooth ride for emerging markets, will it? Investors should be prepared for volatility, but good things in the end.

Jackson: Of course. This is fantastic for your pensions, but I also think if you've got that long-term view, looking toward your pensions, emerging markets are a great asset class. But I do think that throughout the year of 2017 you will get some good returns.

Wall: Paul, thank you very much.

Jackson: It's a pleasure.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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