The tide is turning for Global Emerging Markets
Emerging market investors have spent the last three years worrying about China, the US Federal Reserve (Fed) and economic growth. Of late, the ‘Brexit’ vote in the UK has increased concerns over global economic growth, as well as raised questions regarding the potential impact on emerging markets.
3 November 2016
Kim Catechis, Martin Currie’s Head of Global Emerging Markets and Divya Mathur, Portfolio Manager for Global Emerging Markets visited Australia last week to talk with Australian superannuation fund executives and investors to address these issues and explain why this asset class is such a strong investment proposition today.
Kim Catechis, Head of Global Emerging Markets at Martin Currie said:
“We believe that conditions are changing and for the first time in some years, emerging markets look placed to outperform. Profitability has been recovering, and the emerging markets index has begun to outpace developed markets. Looking out from here, our optimism on earnings growth is based on three factors: stronger economic growth, continued productivity improvements and the anticipation of looser financial conditions.”
The backdrop for emerging market investors now appears to be turning and Martin Currie believes the negativity surrounding the asset class has been excessive.
Investors appear to have accepted that China is not going to have a hard landing and after the publication of the latest five-year plan, the markets seem to be pricing in a greater likelihood of an acceptable outcome in Chinese GDP numbers. It is true that the country still has significant challenges, but the service sector is burgeoning, with some of the most exciting consumer plays to be found in the fast-expanding internet sector.
Traditionally, investors have viewed increasing rates in the US as wholly negative for emerging markets, however it is in fact not that clear cut. It is only when growth is weakening that the rate rises are negative. Global growth expectations are clearly lower than a year ago, but the IMF’s latest forecasts demonstrate that emerging markets continue to monopolise the highest rates of real GDP growth available.
For the emerging markets, Brexit represents a negative, but not catastrophic external political risk to global trade and growth. Investors are rightly concerned about potential trade protectionism, while economic and political uncertainties may conspire to delay capital expenditure decisions. In the short term, Brexit increases the pressure on central bankers to keep rates low. Longer term, however, certain emerging market EU countries could be beneficiaries of foreign direct investment flows from non-EU companies looking to replace or complement their existing manufacturing base in the UK.
Divya Mathur, Portfolio Manager, Global Emerging Markets at Martin Currie said:
“Looking beyond the short-term noise, we believe that there are great opportunities in emerging markets with many businesses that can compound returns way into the future. Valuations are not low, but we continue to find high quality companies with proven track records where we can build conviction for the long term.”
As long-term fundamental investors, Martin Currie continues to find attractive opportunities in every sector and region, irrespective of the prevailing conditions. Moreover, this environment of macro-driven uncertainties helps to underline the benefits of a diversified stock-focused portfolio based on in-depth research and regional expertise, rather than one dictated by macro factors or market-directional thinking.
Kim Catechis said:
“It is conventional to make calls to invest in emerging markets when valuations are distressed. Many observers say they are waiting for this to happen, in order to trigger an opportunistic allocation. We are convinced that this is a mistake, because we do not believe that these ‘distressed’ valuations will materialise. We believe that with the tide turning now on sentiment towards the asset class, and with lowered growth expectations elsewhere in the world, now is the right time to be looking to make long-term strategic allocations.”
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