Skip to the content

Emerging markets rally “not the real deal”, warns Schroders’ Conway

15 April 2014

The fund manager expects a prolonged recovery in the sector to begin at the end of the year, but says there is more pain to come in the near-term.

By Alex Paget,

Reporter, FE Trustnet

Investors should be wary of the recent rally in emerging markets, according to Allan Conway head of emerging market equities at Schroders, who says there are a number of unresolved issues which could cause prices to correct over the coming months.

Having significantly underperformed their developed market rivals such as the US, Europe and UK over the last three years, emerging market equities have started to rally over recent months.

However, Conway, who heads up various funds such as the Schroder Global Emerging Markets fund, says while he is bullish on his asset class in the medium term he doesn’t think the recent uptick is sign of a recovery.

“We have been expecting emerging markets to do undergo a very strong period of outperformance relative to developed markets. However, we expected that to start at the end of the year,” Conway said.

“I am not fully convinced that this is the start of a prolonged bull run or whether it is a false start or more of a trading rally.”

“We do believe that emerging markets have become oversold and we have been telling investors that they should start to be more fully invested, but I think there is still some more pain to come.”

According to FE Analytics, the MSCI Asia Pacific ex Japan and MSCI Emerging Markets indices have both bounced over the last three months while the S&P 500 and the FTSE All Share have posted a negative return.

Performance of indices over 3 months

ALT_TAG

Source: FE Analytics

There have been a number of fund managers who have been backing emerging markets on the back of very low valuations.

For instance, Unicorn’s Peter Walls recently told FE Trustnet that he had bought emerging market trusts for the first time since 2010 this year.

On top of that, Old Mutual’s John Ventre has been upping his exposure to the developing world as he described China as “ridiculously cheap” and “completely hated by the market”.

However, while Conway agrees that investors should be turning back to emerging markets, he thinks volatility will remain for large parts of this year as there are still a number of macroeconomic headwinds which haven’t yet played out.

The manager says that one area of concern is that it has been members of the so-called “fragile five” – Brazil, Turkey, South Africa, Indonesia and India – economies, all of which run a current account deficit and have seen currency weakness, that have driven the rally.


Performance of indices over 3 months

ALT_TAG

Source: FE Analytics

“For instance, I don’t think all the pain has been suffered in Indonesia and countries like Turkey and Brazil could still see further pressure on interest rates because I don’t think that theme has fully played out,” Conway said.

“There is still nervousness surrounding a number of elections, there is geo-political risk in Ukraine and Russia and there are concerns about China’s future growth.”

He added: “There are a number of issues that haven’t yet been resolved, so I’m not sure whether this really is the start of pro-longed Bull Run or a slightly false start.”

Nevertheless, the manager says this is no real reason to be overly bearish on emerging markets either.

“However, if someone isn’t just wanting to buy in for the next six or nine months, its academic, the fact is these markets offer very attractive long term growth and are considerably cheaper than developed markets,” Conway said.

Conway has managed funds in the IMA universe since April 2003.

As well as running the Schroder Global Emerging Markets fund – which has beaten the IMA Global Emerging Markets sector over rolling one, three, five and 10 year periods – he also manages more specialist mandates such as the group’s Emerging Europe, Latin America, Middle East, BRIC and Frontier Markets funds.

According to FE Analytics, Conway has returned 189.61 per cent to his investors over 10 years and has beaten his peer group composite by close to 40 percentage points in the process.

Performance of manager vs peers over 10yrs

ALT_TAG

Source: FE Analytics


The manager is bullish on the long-term outlook for emerging markets; however, instead of focusing on commodities, which had driven the asset class’s outperformance earlier in the century, he is upping his exposure to manufactured goods.

“In terms of our strategy, part of the reason why we are bullish on emerging markets is because of the global economic recovery,” Conway said.

“Because of that, one of our themes is to have a high weighting to emerging market exporters. The countries you would normally use for that are Korea or Taiwan, which are pretty high up the list, particularly in IT.”

Our data shows that JOHCM Emerging Markets, Baillie Gifford Emerging Markets Growth and JPM Emerging Markets Income are examples of funds that are overweight Taiwan relative to the MSCI Emerging Markets index.

Fidelity South East Asia and Invesco Perpetual Emerging Countries are funds which have a high weighting to South Korean equities.

ALT_TAG

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.