POWERED BY MOMENTUM MEDIA
(September-2003) Growing markets
Experts are more bullish about emerging markets than they have been in years, with many fund managers now overweight in emerging markets in their portfolios.
The widely used Morgan Stanley Capital International (MSCI) indices show that in US dollar terms, in the year to mid-August, its World Index rose 10.5 per cent while its Emerging Markets index was boosted by a larger 20 per cent (this falls to 15 per cent if local currencies are considered).
But there are emerging markets and emerging markets. Such markets are clearly more volatile, with wilder swings than in the more developed markets. Selecting the winners is highly risky and uncertain.
On a regional basis, the strongest performers have been in Europe and the Middle East (up 30 per cent) and Eastern Europe (up 27 per cent). Only Asia (up 18 per cent) and the Far East (up 19 per cent) have risen by less than 20 per cent.
Performances of individual countries vary even more sharply from Venezuela (63 per cent up), Sri Lanka (51 per cent), Argentina (40 per cent) and Israel (37 per cent) to Hungary (up 1 per cent), South Africa (11 per cent) and Malaysia (12 per cent).
Of MSCI’s 27 emerging market country indices, all except Hungary have experienced returns of over 10 per cent over the year to mid-August and nine in excess of 30 per cent. Of the 24 national indices for developed countries, only Greece (32 per cent) has returned over 30 per cent. The large markets and those seen as sensitive to Western imports have been the poorer performers.
Aquico Wen, head of emerging markets at Citigroup Asset Management in London, notes that these markets tend to rally about 85 per cent from their lows during a typical business cycle, and that they are currently only about 35 per cent above their October 2002 bottom. He adds that, based on historic price-earnings multiples, emerging markets are trading at a 40 per cent discount to the MSCI World index.
Merrill Lynch researcher David Hudson envisages emerging markets “comfortably outperforming developed markets over the next year, say by 10-20 per cent”.
The experts cite several factors why emerging markets should continue to perform well. Mercer Investment Consulting principal Greg Liddell talks about an improvement in the fundamentals underlying emerging market economies and greater transparency.
In addition, greater exposure to global corporate best practices has given some emerging market companies significant competitive advantages and attractive valuation levels (based on their assessed fair value price compared to their developed market peers and discount on forward price-to-earnings ratios).
Wen notes that the average return on equity of the companies that make up the MSCI EMF index has steadily climbed to about 11 per cent or 12 per cent from low single digits in 1998 and 1999.
Platinum analyst Jim Simpson adds that emerging markets should also benefit from improving commodity prices as years of under-investment coincide with the opening up of new growth areas such as China. “However, sticking to markets least correlated with US imports (which is the big risk today in the global economy today) is likely to be the best strategy, a reason we have been so bullish on India for example,” he says.
Hudson believes that emerging markets should also benefit from “the big clean out in the 1990s. In this cycle they are ahead of the bigger markets”.
He says the high levels of liquidity created by major central banks’ easy monetary policies “reminds one of 1993 when an expanding global economy and US liquidity played nicely to boost emerging markets”.
Against all this, the key risks typically associated with emerging markets have not disappeared — volatility, liquidity, transaction costs and social factors (such as political stability, ethics and democracy issues). For such risks, investors need alluring returns.
The International Bank Credit Analyst says emerging market equities are trading at 10 times next year’s profits — a 40 per cent discount to their 10-year average, and a 50 per cent discount to the average price-to-earnings ratio worldwide.
The Economist recently noted that “this contradiction is partly reconciled thus: the perennial problem of emerging markets is not one of growth but of whether investors will see any of it. The likes of India and (even more so) China have been the graveyard of shattered dreams. Locals seem to be able to keep any profits going thanks to rigged rules, flimsy corporate governance and crime. Small wonder, then, that the MSCI Emerging Market index is still 40 per cent below its peak in 1994, after which crises in East Asia, Mexico and Russia rather dented investors’ enthusiasm for all things emerging”
AUTHOR
External
Recommended for you
Australia’s superannuation sector has expanded strongly over the June quarter, with assets, contributions, and benefit payments all recording notable increases.
The Super Members Council (SMC) has called on the government to urgently legislate payday super, warning that delays will further undermine the retirement savings of Australian women.
ASFA has highlighted that regulation should not be “set and forget” and calls for a modernised test to meet future needs.
The super fund is open to the idea of using crypto ETFs to invest in the asset class, but says there are important compliance checks to tick off first.
TOP PERFORMING FUNDS
ACS FIXED INT - AUSTRALIA/GLOBAL BOND
Fund name
3y(%)pa
1
DomaCom DFS Mortgage
74.26 3 y p.a(%)
2
Global X 21Shares Bitcoin ETF
72.60 3 y p.a(%)
3
Global X GlobalX FANG+ ETF
44.46 3 y p.a(%)
4
Pengana High Conviction Equities B
39.12 3 y p.a(%)
5
Pengana High Conviction Equities A
39.05 3 y p.a(%)
