The Fed’s announcement of its tapering plan hit emerging markets stocks hard and the developing crisis in Ukraine has certainly not helped sentiment in the much-shunned investment sector.
However Fed tapering has been largely digested and understood now, markets have been relatively unmoved by the ongoing events in Ukraine, so far at least, and emerging market governments have taken steps to stabilise their currencies.
It seems notable that at least two major asset managers, Lazard Asset Management and HSBC Global Asset Management, have this week felt comfortable enough with their analysis to be publicly bullish on the sector.
One global equity fund manager is already putting his money where his mouth is. “We have been raising our emerging markets allocation over recent weeks from a low of around 15% of the portfolio up to 26% today,” said Patrick Ryan, manager of Lazard's global equity income fund.
Ryan said he is underweight the US and Japan because he considers traditional defensive income stocks in those countries to be expensive now relative to emerging markets companies. This is a reflection, he argues, of a strong recovery in the US being taken as a given and being fully priced in to most US names. He said many of these stocks are just ‘bond proxies’ in the current environment and correlate with treasuries.
Companies in certain parts of the emerging markets present great opportunities in Ryan’s view, as they have weathered the storm from the Fed developments are well placed to outperform as interest rates rise. “We don’t subscribe to decoupling theory, so we think the recovery in developed economies will benefit the emerging markets in the near future,” Ryan said.
In terms of specific opportunities, Ryan said investors should look at the discretionary consumer space in markets such as Brazil. He said while staple consumer companies are relatively well explored the discretionary product makers like cosmetics manufacturers are not yet. He also points to the casinos and related companies in Macau as another example.
“After the long period of negative sentiment on emerging markets it's turning around now,” Ryan added.
Meanwhile HSBC Global Asset Management has just put out an investment outlook for Q2 2014, outlining what it now sees as potential areas of strong growth and improved returns in emerging markets.
HSBC says the heavy emerging market sell-offs seen in 2013 and early 2014 created huge volatility as investors ran for the door ‘indiscriminately’. The asset manager said that now, a more realistic picture of conditions within the sector is developing and while there will likely be further volatility in the short-term there are attractive long-term fundamentals to be found.
The asset manager believes emerging market central banks’ ‘ bold measures’ to stabilise their currencies, is encouraging for investors as it shows they are developing higher levels of accountability for their countries’ economies.
HSBC did however emphasise that currency risk remains a danger due to the big impact it can have on price competitiveness therefore investors need to be particularly selective if they are going to try and catch this upswing.
