What’s more, an array of geo-political upsets and external shocks have caused investors to bolt over recent years as they sell their exposure to riskier sectors in search of perceived safe havens.
However, is it misguided to just view emerging markets as a fragile investment that have the threat of external shocks hanging over them? Ashmore head of research Jan Dehn seems to think so.
Dehn said: “EM countries are seen as particularly vulnerable to external shocks. The reality is somewhat different. EM countries are far more resilient to external shocks than they have ever been in the past, but markets have yet to catch up with this reality.”
The emerging market sector has shown a considerable amount of resilience recently. Currency mismatches haven’t blown up corporate balance sheets, inflation is under control and portfolio outflows have not damaged EM bond markets.
In fact, for a large portion of EM countries, the fall in commodity prices has improved their economies rather than making them worse.
India is seen as one of the more tempting BRIC countries at the moment, according to some investors. However, the country is facing rising economic pressures from a growing working-age population, which is potentially a big headwind unless enough jobs can be created for them all.
In spite of this, if the new government’s structural reforms are successful, some believe that India could overtake China as the fastest-growing Asian economy.
Alex Wolf, emerging markets economist at Standard Life Investments, said: “India now appears to be at the start of a cyclical recovery due to the confluence of three favourable factors: falling commodity prices, the start of an interest rate easing cycle, and the government prioritising economic reforms.”
“The government’s current incremental approach to reform will boost potential growth, but a larger and more sustained improvement will require deeper reforms.”
Wolf believes that India faces a once-in-a-generation fork in the road and that it’s fundamental for improvements to be made.
“The government needs to improve the education system,” he added, “as well as reduce labour and land restrictions, modernise the power industry, improve infrastructure and encourage greater foreign direct investment.”
“If internal opposition and intransigence at all levels of government cause the reform movement to slow and stall, then India will fail to meet its potential, with serious implications for social stability, the region, and also for global investors, who have started to buy into the growth story.”
Narendra Modi’s new government has started its gradual reform package, promising to improve the environment for business. His election last year prompted a surge in investor sentiment towards the country and led to India being the best performing equity market of 2014.
Comparison of indices over eight years
Source: FE Analytics
A close contender vying for the affection of EM investors is China. India and China share common ground in that they are the world’s two most heavily populated countries and as such their economies bear huge significance on markets globally.
Capital Economics said: “Equities in China and India may be vulnerable this year to some disappointment over the degree of additional policy stimulus in China and the pace of economic reform in India. But the long-term outlooks for both economies are relatively bright.”
However, the recent slowdown of China’s economic growth has spooked many investors. The economy, in the midst of an overhaul towards a consumption-based model, is facing downward pressures and the annual growth target for 2015 has been lowered to 7 per cent.
Despite this, Capital Economics argues that these dramatic changes can only create positive news for EM investors.
It states: “The reforms finally underway in China make a hard landing less likely than for some time, despite the softness in the latest data. This implies that the renminbi will strengthen further over the medium term.”
Comparison of indices over eight years
Source: FE Analytics
A less favourable option at the moment is Russia. The Russian central bank announced today that it has reduced its key rate, cutting interest for the second time in as many months in a bid to support the economy.
Despite the Russian economy being caught between plunging growth and the risk of hyperinflation, however, Jupiter’s Colin Croft told Trustnet last month that Russian investment carries potential at a stock level.
He said: “For those who take a long-term view, I believe 2015 could present an opportunity to buy into quality businesses in the region.”
He’s not alone in his reasoning. Gary Greenberg, head of emerging markets and lead portfolio manager at Hermes, said: “Periodically, Russia will perform strongly as the market responds to rising oil prices, long-term trade deals with countries like Kazakhstan and China, or hints of political or economic reform.”
“Today, with the valuations of its currency and stock market, not to mention dour investor sentiment towards the country, a substantial bounce this year cannot be ruled out.”
The Hermes Global Emerging Markets fund currently maintains a neutral exposure through investments in companies they deem to be solid, such as Norilsk and Mail.ru.
“Still, looking out over the next decade, it is difficult to see how Russia will emulate more successful emerging markets such as Taiwan and Korea, not to mention the developed economies it regards as its equals,” Greenberg added.
Comparison of indexes over eight years
Source: FE Analytics
Despite Russia separating the bulls from the bears, Brazil is currently viewed as a far riskier emerging market investment.
Last week, Brazil’s annual inflation hit its highest level in nearly 10 years. Consumer prices rose 7.7 per cent in the 12 months to February, fuel taxes increased following high transport costs and electricity prices have risen sharply as a result of an extreme drought.
Brazil’s currency is also depreciating rapidly and is trading at its weakest against the dollar since August 2004.
Amid the financial turmoil, formal investigations were launched into 49 Brazilian politicians last week following suspected corruption surrounding Petrobras.
However, is there a chink of light at the end of the tunnel for South America’s largest country? Franklin Templeton’s Mark Mobius seems to think so.
In a Trustnet article this week, the emerging market fund manager divulged that he remains optimistic because everyone else seems so pessimistic.
He said: “As contrarian-minded investors, we are looking for individual opportunities in emerging markets that others may be avoiding, but where we think potential lies – including Brazil.”
Capital Economics also suggests that, now that the Brazilian economy has reached an all-time low, the only way left is up.
It states: “The crisis looks likely to be the final nail in the coffin of much-needed economic reform.”
Comparison of indexes over eight years
Source: FE Analytics