Investors thinking about betting in emerging markets should look at Brazilian stocks, Mexican bonds and banks in the space, strategists and analysts told CNBC. Brazilian
stocks are off to a high-flying start this year as investors bet newly minted President Jair Bolsonaro will push through key reforms. In Mexico
, relatively high yields make their bonds attractive. Strategists are also betting that a dovish U.S. Federal Reserve, constructive outlooks for 2019 and a possible resolution to the U.S.-China
trade war can bolster emerging-market banks, reported CNBC
Emerging markets have been one of the hottest trades of the year. The iShares MSCI Emerging Markets exchange-traded fund (EEM)is up 7.6%. EEM fell 17.1% last year and was in bear-market territory, trading 20% from its 52-week high.
This is one of the best times to diversify into emerging markets Luca Paolini, chief strategist at Pictet Asset Management, told CNBC. "Everything is pointing to outperformance in emerging markets
, he added.
Brazilian stocks are up sharply this year. The Bovespa index, Brazil's benchmark index, hit an all-time high recently and the iShares MSCI Brazil ETF (EWZ) is up more than 10% in 2019. Brazilian stocks are also outperforming the broader EEM fund this year.
Investors around the world have been cheering Brazilian stocks on hopes the new presidential administration can pass push through major changes to the country's pension system this year, said CNBC. Whereas Brazil's generous pension system enables most working citizens to retire in their 50s, this led to massive debt levels and contributed to recent economic troubles in the country. Bolsonaro signaled last month the minimum retirement age for men and women could be raised to 62 and 57, respectively. The average retirement age in Brazil is around 55.
"Confidence levels have increased steadily since October, backed by the government's liberal agenda," Larry Brainard, chief economist for the EM team at TS Lombard, wrote in a note.
"The confidence boost is crucial to sustain the rebound but it must be followed by concrete progress on reforms. Longer-term, sustainable growth is possible only if structural reforms are made."
Mexican bonds are another investment strategists like. They are trading around their lowest levels in nearly decade. The 10-year Mexican yield broke above 9% for the first time since the financial crisis in late November. On Tuesday, the benchmark yield traded around 8.5%
Mexican bonds are under-loved and pricing in the worst-case scenario
, CNBC cited Amr Abdel Khalek, emerging markets strategist at MRB Partners. "We don't see peso bonds as the strongest outperformer in a universe of EM local-currency denominated bonds, but the combination of peso undervaluation and the relatively rich yields mean that they can outperform the benchmark on a 6-12 month basis."
One of the most attractive sectors within emerging markets is banks, according to UBS which reiterated its overweight rating on emerging-market banks last month, noting external risks like the U.S.-China trade war and tighter monetary policy from the Fed are "beginning to recede."
UBS currently forecasts loan growth at 10.5% in 2019, up marginally from 10.2% in 2018 with [net-interest margin] expanding slightly to 3.06% from 3.03%," Philip Finch, global banks strategist at the bank wrote in a 18 Januarz note. He added that he expected EM bank earnings to grow by 13.7% this year and loan growth to reach double digits.
UBS also seven banks in its Top 40 EM stocks list, including Banco do Brasil, OTP Bank in Hungary
, Peru's Creditcorp and Hong Kong's China Construction Bank.