Funds to return to emerging markets in 2017

The U.S. dollar rally may have sucked the air out of emerging market assets, but funds will return next year, Herald Van Der Linde, HSBC’s head of equity strategy for Asia, said on Friday.

“We’ve got this strong dollar rally; we’ve got expectations of inflation coming through in the U.S.; we see the U.S. markets rallying. A lot of that money [is flowing] back into the U.S. on very high expectations of the new administration coming in,” Van Der Linde told CNBC’s “Squawk Box” on Friday. “But what you see is that rally starts to show a little bit of age.”

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The dollar has surged in the wake of Donald Trump‘s surprise election win in the U.S. and as the U.S. Federal Reserve surprised markets at its meeting last week by indicating it would likely hike rates three times next year, a faster rate of tightening than the widely expected two times.

That’s spurred hefty outflows from emerging markets as a stronger dollar and higher U.S. rates have dimmed the allure of riskier assets in developing countries. In addition, emerging-market companies’ ability to service dollar-denominated debt will be dented.

But Van Der Linde noted that the rallies in both the greenback and U.S. bond yields have stalled in late December, adding that not only were expectations for stronger U.S. growth already priced in, but that those expectations may also be getting too high.

“As that momentum slows in the dollar and U.S. bond market, I think what you’re going to see is some rotation back into emerging markets,” he said.

However, Van Der Linde noted that the trade cycle globally remained “extremely weak,” with protectionism on the rise, and advised being selective, particularly in Asia.

“We’re going to focus on markets where there’s a large domestic component available in the markets and not so much on the export cycle, because the export cycle is simply very weak across the region,” spurring HSBC’s preference for India, Indonesia and China plays, he said.

He also expected that dividend-yield and consumer-staple plays would do well, noting that while they had been in favour for the past couple years, they’d lost popularity over the past few months.

In addition, he pointed to plays on themes that weren’t sensitive to global and macro developments, such as financial inclusion, automation, changes in retail formats and the Asian defense industry.

That suggested plays on large-capitalization banks in Indonesia and India, selected consumer names, with defense plays in China, South Korea and Singapore.

Funds to return to emerging markets in 2017 – HSBC