Where to look in emerging markets

Investing in Japan could be risky.

That’s because officials are “trying to inflate an economy that cannot be inflated,” says Benjamin Tal, managing director and deputy chief economist at CIBC World Markets.

He adds, “For ten years, Japan was trying to reach 1% inflation and they weren’t able to do so. Today they’re trying to reach 2%.”

As a result, its economy “is really struggling,” says Tal. “And although we [saw] a huge increase in the stock market and a nice decline in the yen, that was only a temporary story that wasn’t based on fundamentals. The market corrected in a very violent way.”

The only way to get exposure to Japan, he says, is to focus on major companies in the region that export to the rest of the global economy, especially to emerging markets. He says these players will benefit from Japan’s relatively cheap yen and wage structure.

Read: Asian currencies drop

Tal favours China over Japan. He says, “China will start showing some positive signs. The China of tomorrow will be a very different China. It will be led by the consumer and will not be expanding by 10%-to-15%. It will be expanding by roughly 7%-to-8%.”

He predicts there will be a focus on consumer activities in coming years, rather than primarily on infrastructure and exports as is now the case. This will impact the other economies in Asia.

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• New sectors will drive Asia’s growth
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Tal says emerging markets will perform well in 2014 and 2015, after adjusting this year. He adds, “My main focus is Latin America: Brazil, and Mexico, where I believe we’ll see…growth. Those countries have the right fundamentals, the structures and demographic stories that will help them excel over the next five years.”

Read: Identifying emerging market opportunities

Over that period, Tal won’t be long in bonds. That’s because “the bond market is expensive…Although we have seen an increase in long-term interest rates, they might go down a little bit because of some overshooting.”

He adds, “The trajectory is very clear. Long-term interest rates will rise over the next year or two,” reflecting the Fed’s eventual QE exit. That will make markets nervous, and the bond market will correct.

Read: Handling bonds in a low-rate environment

As a result, “we’ll see a lot of money going into the stock market. But where in the stock market?” he asks.

Tal says investors will have to adjust to a slowdown in the U.S. economy—and in global economies—in the early stages of easing. Though markets won’t outperform as people switch from bonds to stocks, he says we’ll see eventual improvement.

And as things smooth out, “big names that pay dividends will do well [due to] the conservative nature of the investments.” Tal also bets on high-beta stocks that take advantage of the improving economic trajectory slated for 2014 and 2015.

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Tal predicts the health and manufacturing sectors will stand out. He has an eye on the “high-tech, capital intensive manufacturing sector, which will continue to outperform.” It’s geared towards Chinese, Mexican, and Brazilian consumers.

Read: Emerging markets still a good long-term bet