Emerging Markets: swap line shows growing internationalization of RMB
10 October, 2013Emerging Markets: report shows Asia pensions growing, but more to do
10 October, 2013Emerging Markets World Bank editions, October 2013
Global fund managers are beginning to find value in emerging market assets, but are still some way short of taking overweight positions in them. The mantra has become: long-term value, but with short-term pain first.
“We are becoming more positive, but are not convinced we have yet reached a clear turning point for emerging market assets,” said John Stopford, head of fixed income and in charge of multi-asset at Investec Asset Management. “We are getting to the point where the sell-off has created more value in equity markets, and it’s a better entry point.” But he spoke of “a difficult transition for emerging market growth” and said “we need to see some reduction in reliance on credit” in emerging markets.
Similarly, Allen Conway, head of emerging market equities at Schroders, said that “with the structural story intact, emerging markets continue to offer investors extremely attractive long-term investment opportunities, particularly given current valuations.” He said the MSCI EM index was trading at around 10 times forward 12 month earnings, “a significant discount to both its history and to developed markets.” But he added: “The problem is that there remain a number of near-term headwinds and capital is, for now, flowing to the developed world.” The possibility of those flows increasing when tapering finally takes effect is one of the headwinds he refers to; also there are current account deficits in several emerging nations, and China’s rebalancing of its economy has softened demand for commodities. He advises clients with a long-term view to add to emerging equities gradually in months ahead.
Last week Schroders conducted a survey of intermediary clients and found that 72% were either neutral or underweight emerging markets in client portfolios, but that 51% expected to increase exposure over the next six months, even though only 15% said they expected emerging market equities to perform well over the next year. This apparent contradiction suggests managers are preparing to position themselves ahead of an expected upturn, even if they have to wait for it to happen.
Archie Hart, a portfolio manager at Investec with an equity focus, said that the degree of sell-off in emerging markets this year was overdone, particularly in Asia. “This has been the worst period of underperformance versus developed markets since 1998 – which was when Asia was essentially going bust. When I compare the situation now and then, the markets have over-reacted.” He said the discount to developed markets had reached its deepest level since 2003, “and if you bought emerging markets then, you would have made twice the return as from developed markets. This is a good time to be involved in the asset class.”
Others said it was important to distinguish between different markets. Charles Robertson, global chief economist at Renaissance, is telling clients to sell assets in twin-deficit countries South Africa and Turkey, in favour of surplus emerging markets. “We favour Russia, and this is what we hear from clients over the past two months of marketing,” he said.
The biggest barrier to resuming positions in emerging market assets, managers said, was the continuing overhang of quantitative easing being unwound. The delay in tapering has led to a rally in emerging assets, but it is also clear that when tapering does come, those assets will be particularly badly hit.
