We’ve reached the end of the bull market for bonds, so we should be piling into equities. But wait, government bonds have had such a tough time recently we should be looking at them again.
TMA! (Too Many Acronyms)
Last year I asked the well-respected chief investment officer of a Pan European asset management company where he thought European equity markets were headed next. His answer was honest and refreshing: “I have no idea.”
Gary Shepherd, Portfolio Adviser’s editor, wrote on here a week or so ago about the hype surrounding the MINT countries of Mexico, Indonesia, Nigeria and Turkey. These four nations are being widely tipped as the next potential economic giants of the emerging markets. At the same time, however, two of these countries also form part of the ‘Fragile Five’ of Brazil, India, Indonesia, South African and Turkey which look most vulnerable to the Federal Reserve’s tapering of quantitative easing. Yet another anomaly. In the quest for yet further alliteration, these countries have since expanded into the Sickly Six and the Exposed Eight.
Contrarian calls
There are some sound reasons why certain countries and asset classes look better value than others right now. But fund managers will always have an agenda, particularly if they only invest in one of them. “Look how well emerging market equities have done in the past quarter,” they say. “It’s the obvious place to be overweight.”
At the same time we hear that because a market has been depressed and/or unloved it makes sense to invest there.The second of these two arguments, although perhaps counterintuitive, actually makes more sense.
Why invest in an asset class that has already done well? Surely you’ve missed a lot of the gains you could have made? Better, surely, to look at an asset class that is about to do well. Provided, of course, you can pick which one that is.
Driven by fundamentals
Michael Mabbutt, head of global credit at Liontrust Asset Management, is a good example. Mabbutt is starting to get very interested in emerging market debt. He is critical of the way emerging markets are being viewed as a whole and is taking a more objective approach. He takes issue with phrases such as ‘Fragile Five’, deeming them to be arbitrary names at best which are merely good for soundbites.
Instead, he is going back to basics and looking at the fundamentals – examining these economies’ current account deficits in relationship to exchange rates and the extent to which they are financed by foreign direct investment. As a result, he says he is now feeling more optimistic about the fortunes of several emerging markets, including Turkey and Indonesia, both of which he has avoided in the past due to their current account deficits.
This has to be the right approach. Ignore the hype and hyperbole. Never mind who is shouting loudest about their respective asset class. Good old-fashioned research should lead investors to the best opportunities and they, as ever, should form part of a widely diversified portfolio.
