The possible tapering of the Feds expansionary monetary policy has resulted in strong outflows, but investors’ indiscriminate selling provides good entry opportunities for investors with a longer-term perspective.
Be specific
Emerging markets are now trading at a discount compared to industrialised nations and have already priced in a lot of the negative news. Patient investors should be compensated with high returns over the long term.
The tapering of QE easing will impact emerging countries to different degrees. Countries with a strong dependency on foreign capital or a high current account deficit, including South Africa, Turkey and Indonesia, will suffer from lower levels of liquidity. We prefer countries like South Korea, China or Russia, which have solid balance sheets and are less dependent on foreign capital.
Investors have now adjusted their economic growth expectations to more realistic levels, with predicted growth rates at 7.6% for China and 2.3% for Brazil significantly lower than three years ago. Nevertheless, growth rates appear to have moved on from lows in a number of countries, reaching an inflection point, and early economic indicators suggest a recovery in the coming months.
After recent price corrections many emerging markets are now trading at a 25% discount to developed nations. Two years ago, emerging market equities were at a 20% premium. Countries such as China, South Korea and Russia are now particularly attractively valued from a historic standpoint.
Overseas earnings from EM companies
The longer-term trends in emerging markets remain solid despite the uncertainty of recent months. Wealth is increasing with rising income levels and consumption growth set to continue after a period of cyclical weakness, not least because consumers’ debt levels are lower than in industrialised nations.
The Chinese automobile sector for example offers structural growth potential. In China only 85 out of 1,000 people own have a car, compared to an average of 500 to 600 in Europe. Internet penetration is only 44%, which opens up a host of investment opportunities in the technology and consumer discretionary sectors.
Export-oriented companies are benefiting from currency weakening in India and Indonesia, and we favour the IT service sector, where the international market accounts for 70-80% of sales.
