Emerging markets to grow independently of West by 2019
Rathbones’ Mona Shah says the recent poor performance of developing economies is nothing more than a blip and that their long-term growth outlook remains solid.
By Mona Shah, Rathbones
Thursday August 23, 2012
Emerging markets have been disappointing over the last 12 months; even European equities have outperformed them to date, despite higher growth rates in the former. We believe this is because investors are less interested in growth levels than the momentum behind the figures.
The momentum behind lead economic indicators (LEIs) on principal emerging economies is currently weaker than global LEIs.
Pressure remains on food and fuel prices, and although policy easing is coming through, it is slower than expected, and given the deteriorating growth backdrop of developed markets, emerging market equities have not seen evidence of a turnaround.
At this juncture, emerging market consumption equates to 90 per cent of US consumption. By 2016, it will be equal to that of the developed world, and by 2019, emerging market consumer demand could have overtaken developed world demand.
In our view, until emerging market domestic demand becomes the key driver of global demand, we will not see de-coupling in earnest.
China has a different dynamic as its high savings and investment rates imply it is under-consuming relative to its peers. By 2024, GDP per capita in China will reach $30,000 and consumption patterns should normalise. So in short, although the China consumption story is widely publicised, there is a longer-term rebalancing taking place.
When investors are allocating to these high-Beta markets, it is important that they also ask what level of economic development they wish to be exposed to. Some of the triggers that analysts are still looking at are $2,000 GDP per capita for when mobile phone penetration starts to take off, or $3,500 GDP per capita for when household consumption more broadly kicks in.
Such stats were surpassed many years ago in the major emerging markets, but if these are the type of specific dynamics investors want exposure to, then it is worth looking at the Goldman Sachs Next 11 Fund, with its exposure to countries like Bangladesh, Vietnam and Nigeria.
Furthermore, the BRICs have become increasingly correlated to global equities over the last 12 months; a markedly lower correlation is demonstrated by frontier markets over the same time period.
In terms of valuation, looking quite simply at P/E ratios suggests a bullish picture, particularly in China, which is now very close to a 10-year low. But similar to many developed markets, there is significant valuation dispersion on a sector level, as consumer stocks remain on more elevated valuations, whereas cyclicals look very cheap.
In our opinion, now looks a good time to make a long-term allocation to emerging markets, but allocating efficiently is difficult. Indeed, the valuation gap between expensive low-Beta stocks and cheap high-Beta stocks is the greatest it has been for 12 years.
This definitely makes active nimble funds more attractive, and furthermore, global or regional mandates, versus single-country funds, which allow managers maximum flexibility.
Performance of fund since launch vs benchmark
Source: FE Analytics
Mona Shah is the assistant manager of the Rathbone Multi Asset Enhanced Growth portfolio. This fund is down 2.66 per cent since launch compared with losses of 4.55 per cent from its benchmark.
The views expressed here are her own.