Emerging market assets have gotten cheaper, but in the face of four key headwinds, it might not be the right time to buy back in, Barclays said.
"Although emerging-market risk premia generally fell in 2002-07, they rewidened last year in anticipation of the end of QE (quantitative easing). In some cases, such as some fixed income markets and especially in equity markets, that rewidening remains tempting," Barclays said in a note Friday. "But it is no longer obvious to jump back in."
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Emerging markets face four key headwinds to regaining momentum, Barclays (London Stock Exchange: BARC-GB) said.
Firstly, China's economic growth slowed from its average of 11 percent annually over 2002-07 to just 8.2 percent over 2011-13, it noted, adding it expects a further slowdown in 2015 to around 6.9 percent.
That slowdown in China, combined with weak demand in Europe and ample supply of commodities, form the second headwind: weak commodity prices, Barclays said, adding it expects them to fall even further next year.
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While commodity importers may see some benefits, exporters such as Russia, Chile, South Africa and Brazil face declining inflows of funds. Russia's official 2014 state budget, for example, accounted for oil (New York Mercantile Exchange: @CL.1) at $114 a barrel and requires prices around $93 a barrel to break even by year-end, Eurasia data indicated. WTI crude oil is trading around $81 a barrel.
The next headwind comes from interest rates, Barclays said.
"Low interest rates in the developed world helped emerging markets via funding costs. But U.S. interest rates are unlikely to fall further," it said, adding it expects growth there to recovery gradually with the Federal Reserve likely to start raising policy rates in mid-2015. Even without an immediate rate hike, "the end of QE marks an important inflection point for global liquidity which has found a home in emerging markets over recent years."
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The final headwind is likely to come from currencies, Barclays said.
"Higher U.S. rates and still-low yields in other major economies means that the U.S. dollar (Exchange:.DXY) could face a sustained rally versus major and emerging-market currencies," it said. "Emerging market FX appreciation gains will no longer be the norm."
A stronger U.S. dollar can increase the import bills for emerging markets, potentially offsetting the benefits of lower commodity prices for net importers.