BlackRock is the latest of the huge money managers to upgrade its view on the asset class, and there’s expectation that growth will soon follow. It says emerging equities are trading at a 24% discount to global developed markets on forward earnings multiples.
This is a fair observation, but with investors’ obsession for uncovering undervalued opportunities could it be that they are just buying solely on price?
Fresh from a successful Rio Olympics, it makes sense to talk about a resurgent Brazil. However, as Manulife’s Kathryn Langridge stressed to me recently, a big question is to what extent the long-term value creation potential is now fully priced in.
“It is not so much that commodity prices have recovered, but because of changes in political risk, and with that there has been a reassessment of the extent to which the Brazilian administration can manage the massive adjustment that is taking place in the economy,” she notes.
Energy continues to dominate the narrative on certain markets, including Brazil and Russia, but it’s easy to forget that the likes of Petrobras, Vale and Gazprom all suffered during the commodities downturn and are not quite as dominant as they once were.
Headwinds have arguably turned to tailwinds – the Fed’s decision to hold back on rate rises has helped while, in Asia, the Chinese authorities have largely stabilised the economy (for now at least) and India is also benefiting from pro-reform policy agenda.
Still, the uncertainties remain about the traditional fund route to emerging growth.
While passives continue to take market share and names such as Somerset, Fidelity and Hermes have made ground on the old guard of First State Stewart and Aberdeen, others recommend an entirely different approach altogether.
Peter Lowman, chief investment officer at Investment Quorum, believes we should be looking beyond the Brics.
“As China’s economy slows, it is having the same issues and problems as the big western economies with property bubbles and debt ratios,” he says.
“The next stage in emerging market equity investing is the frontier markets. The likes of Templeton and Barings have fairly good frontier funds, but there is space for more.
“Once investors have loaded up with emerging markets, whether it be equity or debt, they will probably start looking to frontier markets again. It’s a natural screening process.”
Lowman adds: “I see this in companies in the Asean countries, such as in the Philippines and Indonesia, where expansions in healthcare, technology and energy requirements are benefiting innovative local firms. I think it is a stockpickers market here, as well as in the West.”
That’s not to say frontier markets have been delivering a great deal of outperformance, but certainly if there is to be a revival in the fortunes of developing world equities, then there is no point fooling ourselves into thinking it will be the exact same countries, sectors and, indeed, funds that will be the winners this time around.
After all, if something really is ‘emerging’ then by its very nature it is not standing still.
