We all know emerging market equities have underperformed developed markets in recent years, but what interests me is how high-profile investors are spinning out new narratives on the space.
Why did ex-Goldman Sachs chief Jim O’Neill’s comments on MINTs (that’s Mexico, Indonesia, Nigeria and Turkey) get so much coverage? Probably because investors were fed up with their BRIC funds, well, dropping like a brick.
With the soft closure of more cautiously-minded mega GEM funds from First State and Aberdeen, the big question for fund investors is does a ‘quality’ approach still dominate in emerging market investing, or with markets down, are stockpickers now unearthing good value-opportunities?
No dead cert
Emerging investing has never been, and never will be, a safe bet or – in keeping with the horse analogy – a dead cert.
It would be wrong to assume that Asia will necessarily follow the developed world’s blueprint for apparent prosperity, but there’s no doubt that fund managers have to look harder as analysts have got the big stocks covered.
It is still the consumer-facing sectors that are exciting investors for now, and it will be interesting to see if that remains the case going forward.
So should you invest now? Legal & General Investment Management’s house view is that it remains “too late and too dangerous” to be aggressively underweight, but it’s also too early to buy in.
Three catalysts
Their economists are looking for three catalysts to trade in: investor capitulation which brings valuation discounts to extremes; a distinct positive macro catalyst; or signs that emerging market equities are becoming immune to bad news, and ideally becoming high beta in a rising market.
So what can we expect from a top-down perspective? Interestingly, new research from Nikko Asset Management says the impact of bad debts in China’s shadow banking system is likely more important to the global economy than Fed policy. With such focus on the Fed’s decisions on tapering and possible interest rate rises, it is important to not ignore this dark horse in shaping the future of our portfolios.
