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Adrian Lowcock, investment director at Architas, says investors only begun to revisit the asset class in 2016, which had been unloved for many years. Initially, he says, the bombed-out sectors were the focus of attention, with countries such as Brazil and Russia benefiting as they recovered from extraordinarily low valuations.
“Emerging markets haven’t yet benefited from the rally that has pushed equity valuations in developed markets to high levels,” he says.
“As investors grow increasingly concerned over these high valuations they are looking elsewhere for homes for their money. Emerging markets look more attractive as the global economy seems more stable and the fears of the financial crisis have subsided. No longer do investors fear the system will collapse giving them a confidence to take more risk.
“On top of that the economics for emerging markets look much better. The taper tantrum in 2013 gave the region a warning to address balance sheets and bring overseas debt down to manageable levels, and many countries did so while their currencies have remained cheap relative to the US dollar, enabling them to readily service that debt.
“Emerging markets did not suffer the direct effects of the financial crisis and are not laden with unmanageable debt burdens. They also benefit from a younger working population and plenty of areas for growth.
“They haven’t reached a peak compared with Europe and the US. There is still a population who want to buy new cars and washing machines as well as washing powder and toothpaste. As the working population grows and gets wealthier, demand will continue to grow.
“As such, we expect emerging markets to grow faster than developed markets, at about 4% GDP growth per year, versus 2% growth in developed markets. This helps drive better corporate earnings growth as companies are growing from increased demand not just cutting costs and staff.
“Corporate earnings growth is strong and growing; indeed, corporate earnings in emerging markets are growing faster than in developed markets.
“Investing in emerging markets isn’t just a macro story, there is a lot going on in different countries. India is undergoing massive reform as Modi reduced red tape and introduced a more business-friendly environment. China, which for years was the world’s manufacturer of cheap, poor-quality goods, is making the transition to a domestic consumer, where no domestic consumption makes up over 50% of the country’s GDP.
“At the same time, China is also making significant steps to becoming a global leader of technology, rather than just copying its US counterparts but now leading on innovation and development.
“In contrast, the developed market valuations are high, political risk is generally higher and governments no longer have the room to spend and invest to generate growth while servicing an ageing population.”
