ORLANDO, Fla. -- Client investments in emerging markets, China and Japan should be watched closely by financial advisors, but European markets appear poised for solid, if unspectacular, growth according to global markets experts.

A meltdown in emerging markets was cited as 2014’s “biggest tail risk” in global markets by Jason White, a global equities portfolio specialist for T. Rowe Price Associates, speaking at a session on geopolitical risk at TD Ameritrade Institutional’s national conference in Orlando on Thursday.


“There’s no question emerging markets underperformed last year, and currencies are weakening,” White said. “In 2014 there will be much greater differentials between countries and investors will have to be much more selective.”

Brazil, Turkey, Indonesia, South Africa and India make up “the Fragile Five” of emerging market countries, said Willis Sparks, director of global macro analysis for Eurasia Group. “Growth is slowing and all five are having elections in 2014, which means volatility and policy uncertainty,” Sparks said.

While he was “more sanguine” about Brazil’s prospects after the country’s election, Sparks was “a lot less optimistic” about Turkey, which he described as “a mess.” Successful reforms in Mexico, however, have greatly boosted that country’s prospects in 2014, said Chris Dillon, a global fixed-income portfolio specialist for T. Rowe Price.


2014 will be a particularly critical year for China, the experts said.

“China is very serious about reform,” Sparks said. “The country’s leaders know they have to shift from an over-reliance on exports to a service economy, and that they have to deal with the inefficiencies of state-run companies.”

But tensions between market forces and the Chinese state are inevitable, Sparks added.

“Markets determine winners and losers and the state doesn’t want that,” he explained. “State run companies will defend their interests, and the unemployment risk from market disruption is enormous in China.”

China’s neither-fish-nor-fowl “shadow” banking system is also problematic, said Dillon.

“China is serious about reforming banking, but their timeline is not the same as ours,” he said. “I worry that a crack in the shadow banking system could lead to a sudden stop in the super-cycle of export growth, as opposed to the gradual stop they would like.”


Japan’s economic reforms are also cause for vigilance, the experts said.

The weakening of the yen may be good for exports but not favorable for the country’s debt market, Dillon noted. And the fact that both Japan and China are undergoing major reforms at the same time have contributed to more volatile relations between the two Asian rivals, although White described the possibility of an actual war over disputed territory in the East China Sea as “over-rated.”


The perceived passing of the Euro-zone crisis, however, should be a bright spot for investors this year, the global experts said, despite the possibility of another Greek debt bailout.

“There is a sense that the Euro crisis is gone,” White said, “and we’re seeing positive equity flows into Europe. We think there’s room to grow this year. Valuations are not as attractive as last year, but equity prices are still not expensive. Earnings are still below ’07 peaks, and we see growth in high single digits or low double digits.”

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