Starting on the bond side of the fence, various JP Morgan emerging market indices show falls across the piece: EM hard currency sovereign debt was down -5.25% through last year, hard currency corporate debt down -0.6% and local currency sovereign debt down -8.98%.
GEM bonds not a relative call
Flows, according to M&G’s latest Bond Vigilantes blog, into emerging market fixed income funds still saw net inflows of just under $10bn during the year. However, this is a fraction of the $97.5bn they took in the previous 12 months and its poor second half of 2013 is shown by outflows of $40bn since May.
Claudia Calich, manager of the M&G emerging markets bond fund, says that the relative asset allocation between these three asset classes should be less important in 2014 than it was in 2013 and that the relative value opportunity between these three.
Looking at emerging market bond funds and a similar story is revealed, with the IMA Global Emerging Market Bond sector (that was introduced only a week ago) returning -9.96% in 2013.
The conclusion to this run through of bond statistics is that, as Calich points out, bottom-up security selection and timing will be even more critical this year.
Different asset; same macros
The 2013 equity story tells a similar with the MSCI Emerging Markets index down 9.63 and the IMA Global Emerging Markets index down 7.95%.
Both asset classes share common macro risks of political unrest (Thailand, Egypt, Syria etc), China’s continuing economic slowdown (still growth – 7.6% last year – , just slower growth) the global financial crisis entering a new phase (though nobody quite knows what this means), the winners of 2013 (US, Europe and Japan; small cap investing; equity income among others) not necessarily the winners of 2014; and the deflation/inflation conundrum still to be answered.
The full extent of QE tapering is still to be felt and the emerging markets could suffer more than most. As Andrew Humphries, director (asset management) at St James’s Place Wealth Management argues: “Uncertainty will linger over how emerging economies will fare as easy money dries up and western investors repatriate the funds parked in more exotic locations.”
SATIBI: a rubbish acronym
A ‘fragile five’ in 2013 has been identified by Morgan Stanley as South Africa, Turkey, India, Brazil and Indonesia, with Humphries pointing out they all saw poor currency and stock market performances in 2013, all have elections this year and therefore more uncertainty.
On the positive side, JON (Jim O’Neill, the BRIC maker-upper from Goldman Sachs) is now talking about MINT countries (Mexico, Indonesia, Nigeria and Turkey) as being a positive place to invest – the keen-eyed will note that Turkey is therefore both fragile and a good investment opportunity depending on who you believe.
So, how should investors tackle emerging market investing in 2014?
The emphasis is not to look at a world divided between emerging and developed markets. The outcome of portfolio design might, in the short term, fluctuate between both but the long-term allocations should not really change too much.
We have at least 12 months of more uncertainty ahead and, a bit like the England cricket team, the selections made at the end of the year will be very different from that chosen at the start.
There will be less talk of ‘emerging markets’ and more of specific countries. Ignore MINT (and BRIC, and Civet etc) and invest in what is fundamentally strong irrespective of geography.
With the stronger, developed markets of last year struggling to maintain growth figures – US unemployment numbers are a huge concern – then 2014 could well be a ‘crossroads’ year.
