Tubbs, manager of the $138m Mirabaud Equities Global Emerging Markets fund and former co-head of emerging markets at BlackRock, says the political instability in countries such as Brazil and Thailand and the panic selling sweeping through the asset class is reminiscent of what was seen in Europe two years ago
The MSCI Europe ex UK index has rebounded sharply since then, and although Tubbs says it is difficult to pinpoint exactly when emerging markets will turn, he says history suggests they will come back into fashion before long.
“Emerging markets have been weak for longer than the start of 2014 – it’s been a couple of years now,” he explained
“The reasons for the weakness are down to slowing GDP growth, improving sentiment towards developed equities, political and social unrest and concerns about tapering. This year this has been further compounded by weaknesses in emerging market currencies. It’s been a perfect storm.”
Performance of indices over 2yrs
Source: FE Analytics
FE data shows the MSCI EM index is down 9.6 per cent over a two-year period, following an extended period of outperformance versus developed markets.
Over the same period the MSCI Europe ex UK index has rallied 33.8 per cent, outstripping the MSCI AC World index by almost 12 percentage points.
Tubbs points out that Argentina, which has been the worst affected by the sell-off in currencies, is actually a frontier market, but has contributed to the waning demand for emerging market equities.
He says the social unrest in Thailand, Brazil and Ukraine – the latter, again, isn’t an emerging market – is reminiscent of the turmoil in Greece, Spain and Portugal during the eurozone crisis in 2011 and 2012, and has prompted further panic selling
“Does this impact the companies we’re invested in? No,” said Tubbs
He adds that it’s very difficult to pinpoint exactly when emerging market sentiment will turn, because the range of countries is so vast, but he expects patient investors to be rewarded.
“In Europe, the turning point was the ‘do whatever it takes speech’ from Mario Draghi,” he said.
“Emerging markets is a bit different, because you’ve not got a central bank – you’ve got a number of different political systems, employment issues and currencies. For that reason it’s unlikely that there would only be one catalyst.”
“What is more likely is that a number of small catalysts will be enough to shift the focus. One example would be a reverse in the bullishness towards the US.”
“If the economy doesn’t recover in the manner that people are expecting and Fed tapering has more of an effect than most fear, you could see the focus come back to cheaper emerging markets. Most see tapering as a negative for emerging markets, but it can be flipped around.”
“Similarly, a recovery in the European economy will be good for Asian exporters – particularly in Taiwan and Korea.”
“Credible policies to help support the fragile five [Brazil, India, South Africa, Turkey and Indonesia] will further help general sentiment. You’ve already seen them hike interest rates and the current account deficit is getting smaller and smaller.”
“Lastly and perhaps most importantly, you’d need to see more positive signs coming out of China. A possible catalyst will be the upcoming National People’s Conference in March, which should shed more light on the social reforms outlined in the third plenum last year.”
Tubbs adds that GDP growth in China and beyond doesn’t necessarily need to reverse in emerging markets for stock markets to rebound, shown by the strong performance of certain peripheral countries in the eurozone last year.
“Portugal, Italy, Greece, Ireland and Spain all rallied up to 30 per cent last year, despite GDP data being negative,” he explained
“It’s all about looking at bottom-up fundamentals and valuation, and right now investors are too bearish on emerging markets, as they were for Europe two years ago.”
“Sentiment always swings from one extreme to another, and that’s where we are now. The ‘greedy when others are fearful’ argument is relevant here, and for that reason I’ve been adding to certain positions in the fund.”
Tubbs says he has recently upped his exposure to Russian equities, which are four standard deviations cheaper than their historical average.
Performance of indices over 2yrs
Source: FE Analytics
FE data shows the MSCI Russia index has vastly underperformed even the MSCI EM index in recent years.
Russia is a 10.6 per cent position in the fund, making it one of Mirabaud Equities Global Emerging Markets’ biggest overweights.
The manager has also added to Chinese construction businesses which have suffered badly in the most recent sell-off, even though sales figures are very strong.
Tubbs’ comments echo those of Bruce Stout, manager of the £1.2bn Murray International IT, who is overweight the Asia Pacific region.
He agrees that the negative sentiment towards emerging markets has gone too far, and is buying into them as a result
Speaking to FE Trustnet last week, he said: “The best opportunities arise when emotions get involved.”
Tubbs joined Mirabaud in 2011, having spent two years running the BlackRock Emerging Markets fund.
He has run Mirabaud Equities Global Emerging Markets since its launch in July 2012, leading it to losses of just over 2 per cent in the process – almost exactly the same as the MSCI EM index.
The manager is ahead of his peer group composite since he started running funds in 2009 however, with returns of 69.94 per cent.
He’s currently also in charge of the $177m Mirabaud Equities Asia ex Japan portfolio.
Performance of manager vs peers since Apr 2009
Source: FE Analytics
The emerging markets fund has an annual management charge (AMC) of 1.86 per cent.
It is available on certain platforms, and the group confirmed it is looking to make it available on others in the future.
