As equity investors grapple with the question of whether or not they should put new money into already booming global markets – and as once contrarian calls in Europe and Japan become fully realised – the lure of the emerging world becomes stronger.
And it seems professional investors are already dipping their toes in…. though, of course, certainly not getting up to their neck in these high-risk assets. According to BlackRock, three in five London-based wealth managers are planning to raise allocations to emerging markets, with three in four looking to up their Asian equity exposure.
Moving on
Assuming that emerging markets will (eventually) rise again, we also have to assume that these economies have by their very nature moved on and that our way of accessing them should do to.
“They could be significantly off the highs, but they could also go down even deeper – but then that has always been the way with emerging markets, and always should be,” comments Brian Jacobsen, portfolio strategist at Wells Fargo Asset Management.
He believes catalyst for re-pricing will be one-off events, such as the BJP win in the Indian elections, a correction in the Chinese property market, and developments in the tensions between Russia and Ukraine.
Crucially, Jacobsen has also changed his stance on which kind of companies offer the best investment opportunities.
“Last year I recommended quality in emerging markets, but now I think the advantage has shifted towards the bargain hunters and in favour of deeper value opportunities,” he says.
Talking opposites
“I could see the rotation opportunity in the US which last year was driven by momentum, but this year things there have changed back towards quality growth leadership. But it is the opposite in emerging markets where we are seeing value leadership.”
Jacobsen currently favours Asian consumer discretionary, industrials and IT companies, though with emerging market indices dominated by financial and utilities, it suggests that a highly selective, stockpicking approach is vital.
Those funds that have traditionally focused on ‘quality’ investments – particularly the global emerging market vehicles from First State and Aberdeen – have proved to be an especially popular first port of call for many wealth managers, but this may not necessarily be the case going forward.
Ross Hunter, investment manager at Anderson Strathern Asset Management, says his portfolios were hit by poor performing emerging markets at the start of 2013, and he has since moved to more of a defensive stance – pro-China and underweight Latin America.
Anderson Strathern current favours Fidelity Emerging Markets, which adopts a blended approach, though Hunter asserts that the “days of investing in global emerging markets funds are probably over, because it is a very rudimentary way of investing”. Still, neither is he convinced by country-specific investing in these regions.
No tantrum
He adds: “The full effects of fiscal tightening if that pans out haven’t been seen, and possibly we won’t have the taper tantrum we had last year again. The funds that did well over that period – in May and June 2013 – we would anticipate will do best over the next two or three years.
“That’s where we are. We had significant holdings in both First State and Aberdeen, and they took quite a tanking towards the end of last year and start of this year.”
