Years of steady falls in the valuations of emerging markets and commodities mean contrarian investors should be starting to get interested in these areas again, according to Schroders’ Marcus Brookes, who concedes that the timing of the move might prove to be difficult given ongoing volatility. 
Markets have sold off strongly over recent weeks, with China’s slowing growth and currency devaluation bearing the brunt of the blame. Fears that the country is heading for a so-called hard landing have also impacted on commodities, as a lack of demand from the world’s second largest economy heralded the end of the ‘commodity supercycle’.
As the graph below shows, the last three years have proved challenging for emerging market equities, commodities and global mining companies while the heavy losses of the last few days in these parts of the markets have been well publicised.
Performance of indices over 3yrs 
Source: FE Analytics
But Brookes – who runs a number of multi-manager portfolios at Schroders including the £1.3bn Schroder MM Diversity fund – says this prolonged weakness could make these parts of the market attractive when compared with areas that have been bid up significantly by loose central bank policy, such as US equities and fixed income.
The manager, who was speaking to FE Trustnet just before the correction in the Chinese stock market and subsequent global sell-off, said: “Emerging markets and Asia is an area that we were highlighting at the beginning of the year as one where there could be an opportunity for investors to start building positions – if there was some weakness.”
“We’re starting to see that weakness, it’s just whether or not you need to be brave enough to go this early. I suspect we may wait a little longer.”
However, this does not mean Brookes is necessarily tipping a large allocation to emerging markets. In fact, he cautions investors to be mindful of their overall exposure to emerging market equities, debt, currencies and correlated assets like commodities as “it’s basically all the same call”.
The big issue, of course, is China, which has been increasingly in the spotlight after continued signs of economic weakness, the crash in mainland stock markets and move to devalue the renminbi sparked concern among investors worldwide.
Performance of indices over 3 months
Source: FE Analytics
Brookes (pictured) is holding off on putting more into emerging markets until there is greater clarity over the health of the Chinese economy, but the resilience of developed markets – where the manager thinks growth is broadly “on track” suggests a buying opportunity could be at hand. 
“We’re now thinking ‘when is the right time?’ We think the West is fine but the big worry therefore is what is happening in China. There are several people we speak to who are starting to highlight some pretty deflationary trends coming out of China and how that may well prove to be a global growth worry,” he said.
“Some managers have been vocal about positioning for a China growth scare, such as Crispen Odey. But there are others who say there’s a growth slowdown as the economic transitions but a move towards a market-derived currency value is something that a maturing economy like China should be trying to do. I don’t think the argument over which is this is true is very well defined at the moment but they have two very different outcomes.”
“We think that we are going to see market movements over the next three to six months where you may be presented with more opportunities. It may be that there is a deflationary outcome and therefore bonds need to be in your portfolio. But it could be that our core scenario is true, where growth is on track and cheaper emerging markets and commodities are the place to be.”
As mentioned, commodities have endured a rough ride as emerging markets sold off. The graph below shows the performance of a number of commodities – oil, natural gas, copper, nickel and agriculture produce – over the past five years, illustrating their generally downward trend.
Performance of indices over 5yrs
Source: FE Analytics
Brookes said: “The commodities story is not a new story, they’ve been weak now for about five years. If anything, it could be an area that people need to start thinking about when they are going to get bullish on – I’m not saying they should be getting bullish right now.”
“But you want to be buying things when people are fearful and they’re pretty fearful of commodities at the moment. If you look at a 13-year chart, commodities are only about halfway back to where they were in 2002. If you want to get yourself scared, you could say these things still have a long way to go but if nothing else, people should reflect on the fact that if they were prepared to buy them three or four years ago then they’re looking a lot cheaper today.”
“Maybe people need to be thinking about being a bit contrarian and having a little bit of exposure. Buying something when it’s still falling means it can be quite hard is difficult to get it at the bottom, if you’re convinced the commodity space has some value over the next three years, you have to buy in early but in small amounts.”
Schroder MM Diversity, which Brookes runs with Robin McDonald, has made a second-quartile total return of 37.80 per cent since they took over in October 2007, compared with a 25.43 per cent average return from the IA Mixed Investment 20%-60% Shares and a 21.56 per cent rise in its consumer prices index benchmark.
Performance of fund vs sector and benchmark over manager tenure
Source: FE Analytics
Lacklustre returns in 2014 on the back of the fund’s high cash weighting and significant underweight to fixed income – the managers believe bonds and many parts of the equity market are overvalued – means it sits in the third quartile over three and five years.
However, its cautious positioning (around 29 per cent of assets are in cash) mean that it has turned in top-quartile numbers over three and six months as markets went through their rough patch.
Schroder MM Diversity has a clean ongoing charges figure (OCF) of 1.26 per cent.