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Don’t be lured back into “cheap” emerging market funds, warns Martin Currie

22 May 2014

Economic headwinds, poor corporate governance and high valuations in the most desirable companies are all reasons to avoid the emerging markets, says Tom Walker.

By Thomas McMahon,

News Editor, FE Trustnet

Investors should be very wary of buying back into supposedly cheap emerging markets according to Tom Walker, veteran manager of the Martin Currie Global portfolio trust, who says the companies you might want to buy are far from cheap.

After a terrible three year period emerging markets have seen a slight bounce in recent months as investors took profits and rotated into cheaper areas.

Performance of developed and emerging markets in 2014

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Source: FE Analytics


However, Walker warns against seeing this as a signal to buy back into the region, warning that economic growth won’t necessarily be reflected in the domestic stock markets.

“A lot of people were able to outperform for so long by being overweight emerging markets,” he said. “A lot of funds are structurally overweight emerging markets.”

“But we are sceptical about total shareholder return in emerging market companies.”

“China will grow faster that other parts of the world, but investing in Chinese companies might not be the best way to access that.”

Walker adds that the quality companies in emerging markets are still looking quite expensive having done relatively well.

“It’s dangerous looking at market averages,” he warns.

On top of this the economic outlook remains poor, meaning that investors should be wary.

“Emerging markets are very challenged at the moment and they are at a different point in the cycle from the rest of the world and are seeing inflation and higher interest rates where the developed world is seeing disinflation and low interest rates,” he said.

“They are having to deal with higher interest rates while exporters are struggling and inflation in asset prices is a particular issue.”

The Martin Currie Global Portfolio trust has had an excellent three years, more than doubling the returns of the average global growth trust.


Performance of trust vs sector and index over 3yrs

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Source: FE Analytics


Walker has run the portfolio since January 2000, and this is his best period during that time when it is compared to the other global trusts.

The portfolio trailed its peers in periods when emerging markets outperformed – although it substantially beat its benchmark.

Performance of trust vs sector and index since Jan 2000

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Source: FE Analytics


The trust has returned 148.12 per cent during Walker’s tenure against the 69.33 per cent of the FTSE World.

Walker says that he is unconcerned about the argument that developed markets are over-valued.

The trust has 50.5 per cent in the US and 29.2 per cent in Europe including the UK which the manager says is a result of bottom-up analysis rather than macroeconomic calls and reflective of the value that is still around.

Walker says that rates are likely to rise later than most investors expect and QE will continue for another two to three years, with stocks likely to rise higher whatever their valuations.

“I think there is value in the markets because value is a relative concept,” he said. “While central banks are throwing around cash like there’s no tomorrow and interest rates are zero something has to happen to that cash.”

“Asset prices aren’t driven by economics at the moment but QE: the direct driver is QE and what’s happening in the economy is further down the line.”

Walker says that paradoxically it is his negative views on the economic health of the economy that makes him positive on the prices of stocks.

“We are seeing deflation in Europe, a consumption tax will cause a slowdown in Japan, emerging markets are not significantly large domestic economies to stand on their own two feet and the US economy is down every second quarter.”

“Yellen says maybe QE will end in 2015? 2015 is still very long time away, and this economy is not robust enough. We won’t get out of QE for another three to five years.”


“In fact I don’t see how we do come out of it, we are so far into it.”

“The bond market is telling you the economy is only so robust that you can get 2.5 per cent on 0 year bonds.”

“That doesn’t tell me the economy is robust!”

Relative valuations still make some stocks much more attractive than others, Walker explains. He says that he owns Ebay on 16 times earnings rather than Amazon on 300 times falling to 90 times next year, for example.

Martin Currie Global Portfolio is a large cap fund and has been helped as large caps have come back into favour this year. Walker says he expects this trend to continue.

“I think it’s getting harder and harder for the markets to keep going up with the current low growth,” he said.

“Mid-caps have been one of the bubble areas that have got over-valued and a lot of money is coming out.”

“We have seen that theme roll over as a risk-off mood takes hold of the markets. I was around during the TMT bubble and it smacks of that again.”

Ongoing charges on the trust are 0.75 per cent and it is yielding 2.4 per cent and trading on a premium of 1 per cent.
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