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JPM’s Flanders: Three ways to make money from emerging markets

09 April 2014

The former chief economics correspondent at the BBC says investors should not be put off by the recent poor performance of the sector, but says there are three considerations they should bear in mind.

By Daniel Lanyon,

Reporter, FE Trustnet

Investors should not be afraid to take on risk in emerging markets, according to Stephanie Flanders, JP Morgan’s chief market strategist for Europe.

ALT_TAG The region has become increasingly out of favour over fears an end to stimulus programs in developed economies, particularly the US, will negatively impact emerging markets.

The MSCI Emerging markets index has fallen 11.45 per cent over three years compared to rises in the FTSE All Share and S&P 500 of 25.52 per cent and 42.76 per cent, respectively.

This sentiment has been exacerbated in the past year with two sell-offs; in May 2013 and January 2014.

Performance of indices over 3yrs

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Source: FE Analytics


Flanders, former chief economics correspondent at the BBC, says there is still a lot of spare capacity in the global economy following the financial crisis that will boost markets as growth returns to a long term trend, and there is huge potential in emerging markets.

“The shortfall in world output caused by the Financial Crisis in 2008 has created allot of spare capacity in the global economy that is currently unused,” she said.

“We are so far away from where we would be if we’d just carried on our long term trend.”

“Growth rates are well below average and well below the potential for global economy.”

Flanders says this has also been exacerbated by a risk aversion to emerging markets by bearish investors, evident by a renewed demand for risk free assets such as fixed income.

Fixed income, traditionally seen as a safe haven investment, has a had a surprise upturn in in recent months following the sell-off in emerging markets in January 2014.


Performance of indices since 1 Jan 2014

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Source: FE Analytics


FE data shows the both government and corporate bonds have risen 2.99 per cent and 2.7 per cent respectively, since the January 1 2014. In comparison the MSCI Emerging Markets index has risen 0.23 per cent over the same period.

Here are Flanders’ three tips for investing in emerging markets.


Don’t wait for the bottom of the market

Flanders says negative sentiment makes it difficult to time the market and decide when to re-enter but that investors don’t want to wait until the market bottoms out to buy in either.

She says investors are still too worried about the downside risk to emerging markets.

“We’ve had a real decline in price to book ratios in emerging markets. Emerging markets look cheap, but there is a difficulty in deciding when is best time to enter them.”

“Everyone seems to be waiting for a capitulation point in emerging markets and historically you’ve need to see growth forecasts picking up before you go in and that is what people are currently looking for.”

Investors want to make sure they’ve seen the bottom [of the market] before they go all in, but you can’t wait until you’re completely comfortable either.”

“However, if you have a particular story about an emerging market, valuations are looking pretty compelling.”


Maintain diversification

Flanders says although she expects a safer macroeconomic environment she expects it to be a bumpy road in the near term and so says investors should maintain a diversification to developed markets.


Buy Mexico, avoid China


Flanders says the emerging market countries most plugged into developed market recovery, particularly Asian exporting countries have not done well in the past few years, but could become attractive again.

“The problem with Chinese equities is that they have shown no correlation with GDP growth at all and they are entirely driven by international investment swings and so I don’t think investors should be piling into them.”

“If you look at the last three years they’ve been a dismal investment and there’s no reason to expect that to get any better.”


Performance of indices over 3yrs

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Source: FE Analytics


“What you want to find is companies with good balance sheets that are more plugged into developed markets and the supervised recovery that goes along with that.”

She says emerging markets such as Mexico still offer a compelling growth story, however.

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