Emerging markets offer renewed opportunities

According toDeutsche Asset Management’s UK-based global head of emerging markets Matt Linsey, one asset class that has returned to favour and lost the stigma once associated with it is emerging markets.

Linsey believes the level of volatility previously linked to this asset class no longer exists, adding that much of the volatility of international markets over the past two years has in fact been in so-called developed markets.

Therefore, investor reticence on a global scale tends to be directed towards these developed markets at present, according to Linsey.

“Investors globally are extremely wary of slow nominal gross domestic product (GDP) growth, deflation, the US current account deficit and continued historically high stock valuations in developed markets,” he says.

“Emerging markets [on the other hand] are trading at a significant discount to developed markets and their currencies are now very competitive with many having gone through painful devaluations.”

This would help explain Linsey’s assertion that emerging market investments are in fact defensive allocations and not the highly unstable risky investments they are often perceived as.

“I know when I say this I get a lot of strange reactions and people think I’m crazy. However, the large current account surpluses and rising reserves in many of our markets supports our belief that emerging markets are primarily defensive, ” Linsey says.

According toING Investment Managementinvestment strategist Eric Siegloff, China and India will be the main growth engines for not only the Asian region, but for emerging markets as a whole over the next few years.

Agreeing with this notion Linsey says, “If you look at global demographics and where future world growth will stem from over the next five to 10 years in terms of young populations and new markets, then you have to look at places like China and India”.

Deutsche is very bullish on India in terms of its favourable demographics, high levels of liquidity and the fact that valuations are reasonable.

Other countries strongly placed for growth include South Korea and Thailand, which remain the most balanced economies with robust levels of domestic demand and solid exports, Siegloff says.

Meanwhile, Siegloff points out that the Philippines and Indonesia still have a number of rivers to cross in relation to their respective high budget deficits and prevailing levels of political uncertainty.

Latin America has been one of the strongest performers for the asset class so far this year.

“In particular, Brazil has performed very strongly on the back of a highly competitive currency and an improved political climate,” Linsey says.

In May, emerging markets continued to perform well in line with a general upswing in global equities.

“The growing confidence in the global economy benefited the more open economies of Asia (8.6 per cent) and emerging Europe (11.6 per cent). With the risk aversion trade that had benefited Latin America (3.1 per cent) in previous months not making any further advance,”Schroder Investment Management Australiainvestment director Greg Cooper says.

According to California-basedGMOportfolio manager Sam Wilderman, after an incredible run over the first four months of the year, Argentina (up 33 per cent) and Brazil (up 31 per cent) finally paused for breath in May, with both markets posting flat returns over the month.

However, Wilderman says that GMO remains extremely upbeat on South America, as it does with Asia, and intends to maintain its already overweight position in these two regions.

For the asset class as a whole, Cooper believes further market gains now depend on robust earnings and greater confidence that reasonable global growth will be sustained over the coming year.

“Our portfolios continue to be positioned to benefit from the likely medium-term strength in markets, but given the residual uncertainties over the macro-economic picture, retain a preference for stocks and markets with a strong domestic or secular flavour, which are therefore resilient to macro-economic volatility,” he says.

Most emerging market funds on offer to retail investors in Australia tend to be regionally focused (that is, Asia ex-Japan) and are offered among others by ING Investment Management andPerennial Investment Management.

However, some managers do offer investors access to global emerging market products such as Schroders, GMO and Deutsche.