Investors should expect the recent rally in emerging market equities to continue throughout 2015, according to Franklin Templeton’s Mark Mobius.
Emerging markets have had a tough few years as concerns about slowing economic growth, falling commodity prices and political woes have all weighed on sentiment towards the developing world.
As a result, they have largely been pushed to the sides by investors who have instead favoured developed markets where returns have been generally strong. However, over the past year and particularly in 2015, emerging market funds and the broader index have rocketed up.
According to FE Analytics, the MSCI Emerging Markets and the average IA Global Emerging Markets are fund up close to 15 per cent beating major developed markets by more than 10 percentage points.
Performance of indices and sector in 2015
Source: FE Analytics
Mobius (pictured) says a lot of this re-rating has been driven by a huge surge in the Chinese index owing to a wave of money entering its markets for the first time thanks to structural reform of its retail investment market. However, he notes that the ongoing trend is being driven by investors in US stocks moving into emerging markets. 
“It is true emerging markets have underperformed developed market these past two years but this year emerging markets have outperformed and a lot of that is China and what is happening China.”
“However, I see this [the rally] continuing because if you look at the valuations of emerging markets now, it is lower than the US market and so there are a lot bargains for internationals investors to buy. That is the reason we are seeing the movement from the US to emerging markets."
“I think it will continue throughout this year and as Brazil recovers and if the sanctions on Russia are released. Of course India is still going through a revolution of reform under Narendra Modi - this is going to be another aspect that will push the markets higher.”
Cross Border Capital have also noted the trend and believing that there has been large capital shifts to emerging markets with many investors “plainly concerned by the threat of US tightening.”
“What really matters for markets is the balance between Chinese and US liquidity. These two economies control more than half of Global Liquidity,” Cross Border Capital said.
“Since 2012, China and America's liquidity pumps have been operating at very different speeds, with the US strong and China weak. Now, just as the US Fed is debating tightening policy, China's People's Bank of China [its central bank] has begun to ease.”
“Our data show that these extremes may be changing places. US liquidity is sliding (underscored by the threat of a mid-year Fed tightening) while China’s PBoC is definitively easing, with the only doubt about the speed of both. Who will be the more aggressive? Our money is on China, since the Fed is likely unable to tighten much anyway given the nervous state of the economy.”
“We are hopeful that China's easing will eventually outpace US tightening, but the evidence is not yet there. Consequently, our models still favour a rotation out of the US into Eurozone and emerging markets.”
Mobius says another huge trend in the recovery of emerging markets from their torrid few years is the improvement in the political quandaries respectively facing Russia and Brazil and how this has brought sentiment back to these once fast growing economies.
The MSCI Brazil index lost more than 40 per cent since its peak last year, mainly due to a fall in the oil price but as also a huge political scandal involving the alleged corruption of top level politicians within the newly formed coalition government and the country’s semi-public oil company Petrobras.
Russia, also knocked back by the low oil price was heavily out of favour due to the effect of sanctions on its already fragile economy following its annexation of the Crimea peninsular and entanglement and standoff with Ukraine.
However both countries have seen their markets bounce back hard in recent months, providing huge windfalls for those capturing who caught the bottom of the market.
Performance of indices over 1yr
Source: FE Analytics
Mobius says these cheap valuations and subsequent re-ratings helped to bring emerging markets back into investors minds.
“You must remember that Russia and Brazil were in deep, deep trouble. They had underperformed massively. Whenever you see that happen the recovery percentage is tremendous and that is what we are seeing now,” Mobius said.
“Russia has come up by 30 to 40 per cent in dollar terms and Brazil has come up by at least 40 per cent so that has had an impact on the overall emerging markets structure and it is not only happening in those three emerging markets.”
Mobius is one of the longest serving managers in emerging markets having run the Templeton Emerging Markets investment trust since 1989.
Performance of trust and index since 2000
Source: FE Analytics
Our data on the closed-ended fund goes back to December 2000, over which time the manager’s value style has meant the trust has returned 535.8 per cent, beating its MSCI Emerging Markets benchmark by close to 200 percentage points.