A port in the emerging markets storm

"Taiwan is our preferred market because it's defensive and its growth prospects will not deteriorate much in the current environment," Maarten-Jan Bakkum, an emerging markets strategist with ING Investment Management, said.

The latest gross domestic product data showed that Taiwan's economy expanded by 1.7% in the first quarter, higher than a first estimate of 1.5%.

Plus, the country has had no asset price bubbles as its relatively low growth and its policy of keeping a low debt to GDP ratio – it currently hovers around 40% – have kept hot money away, Bakkum pointed out.

"For investors, that's a place to hide," he said during a presentation of ING Investment Management's outlook for emerging markets.

The country has a big and liquid equity market and investors could also get in via ETFs; the IT sector, which is a big export, is interesting, Bakkum said.

"That's an additional reason to like Taiwan: it has much stronger links to the US," he said.

Strategists at ING Investment Management are bearish on China, saying that the country's economic growth could slow to 5% by 2016, in a soft-landing scenario. But they see the US recovering and prefer countries that have strong ties with the world's biggest economy.

"We have a group of countries that we like fundamentally, but we have to watch out for at this point. We are still overweight in them, because you have to invest in something. They are Mexico and India," Bakkum said.

Mexico is sensitive to the global risk appetite and to the stampede out of emerging market debt because of the high foreign ownership of its bonds, but it is a country with "a reasonable growth picture, where reforms are still taking place and it is close to the US," he said.

'CALCULATED RISK'

India has a relatively large current account deficit and its currency has weakened recently, but "the market has not underperformed; it can start outperforming again, because it is, longer-term, a good story," Bakkum added. 

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Some analysts are wary of India because of its stop-go track record in implementing reforms.

"There have not been great reforms, but there have been reforms," said Bakkum, but warned that, although the fiscal stance was improving slightly, the elections are drawing near. "With India we are taking a bit of a risk, but it's a calculated risk."

In terms of sectors, the ING Investment Management strategists are "very cautious" with materials and financials and like more defensive ones like utilities and telecoms and also the IT sector, which is more related to the US economy.

They are most concerned about South Africa, Indonesia and Brazil.

South Africa has a combination of high current account deficit and political problems that, coupled with the outflows from emerging markets, has led to the rapid depreciation of its currency.

Brazil, with its large state intervention in the economy and infrastructure bottlenecks, has been punished by investors and protesters alike for slow structural reforms.

Indonesia "has a good starting point," with low debt ratios and low leverage compared with Asian peers.

"But what matters is the change, the dynamics, the speed at which the budget deficit deteriorated, the speed of the increase in debt, the fact that credit growth is 20%," Bakkum said.

"The change has gone very fast and there's pressure now on the currency. They have to defend the currency now, they're burning reserves."

The current correction in emerging markets "should be done in a few months" but the main headwind – the slowdown in China – will continue, he predicted.

"We have to see how big the correction will be and whether there will be a need for another correction," Bakkum said.

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