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As Trade Wars Heat Up, So Do Emerging Markets

NAFTA is on the table and MSCI is planning to return Argentina to its frontier to emerging markets index — and asset managers are finding ways to cope amid those and other changes.

  • By Alicia McElhaney

With Argentina added back into the MSCI emerging markets index on Wednesday and the North American Free Trade Agreement potentially being re-negotiated over the summer, emerging markets in Latin America are in the spotlight this year — and growing in complexity. 

These and other themes emerged at a BlackRock roundtable held in Manhattan on Thursday, entitled “Latin America in Focus: Summer is Coming.” Investors from asset managers including FIS Group and NorthCoast Asset Management shared their views at the event, alongside some of BlackRock’s own experts on the region. 

According to these investors, it is getting harder to differentiate between developed, emerging, and so-called frontier markets. 

“The line between developed and emerging markets is a lot more fuzzy than it used to be,” said Axel Christensen, chief investment strategist for Latin America and Iberia for BlackRock. “Emerging markets are becoming a much more complex landscape.”

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According to Tina Byles Williams, the founder and chief investment officer of FIS Group, her firm has looked at hiring local asset managers to handle Latin American allocations. 

“With this concept of global emerging markets managers versus local or indigenous managers, it’s important to recognize that local investors have an important perspective,” she said Thursday. 

The approach makes sense: local managers are closer to the market they are investing in, after all. 

“There is a contrast between how local and foreign investors view the market,” Christensen said. “Local investors tend to be more dramatic, but it’s reasonable for that to happen because they have more skin in the game.”

Patrick Jamin, CIO of NorthCoast Asset Management, said his firm, which employs a quantitative approach to investing, uses hedge funds’ positions in Latin American countries as one barometer of performance in the area. 

These markets are quickly changing, as evidenced by MSCI’s announcement Wednesday that it will return Argentina to its emerging markets index, upgrading it from frontier market status, beginning in mid-2019. 

According to Martin Small, BlackRock’s head of U.S. and Canada iShares at BlackRock, more change is on the way. 

“A broad re-shaping to emerging markets will happen when China enters the developed markets,” Small said Thursday. “It will reshape how allocators include China in their portfolios, and it will happen way faster than people expect.”

This will then affect how asset managers allocate to emerging markets like Latin America. 

Williams added that the “trade spat” heating up between the United States and China is having an effect on the region: while Mexico is a “clear casualty” of the tariffs, Brazil stands to benefit, especially because of its soybean crops. 

“The next two months are going to be really important,” said Williams, noting that not only will China have an effect on the region, but that NAFTA negotiations will come into play. She said she expects President Donald Trump to try to negotiate a bilateral deal. 

“We’ll see the “de-gringo-isation” of Latin American trade,” Williams said. “I think a bilateral deal will probably be cut.”

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