Tide turns in favour of emerging markets
Low levels of debt and stronger fundamentals than in the West mean the sector is poised to outpace the global recovery.
By Mark Smith, Reporter, FE Trustnet
Monday April 16, 2012
Emerging markets regions are well positioned to post strong growth now that global fears have begun to abate, says FE Alpha Manager James Donald
The manager of the £522m Lazard Emerging Markets fund says investments of this type are showing strong signs of reversing the poor performance they experienced last year and the renewed optimism is being reflected in inflows.
The headwinds that hit performance in 2011 significantly eased in the first quarter of 2012 and investors are recognising this trend and committing more money to emerging market equity sectors. Outflows of $34.2bn in 2011 have been reversed, with inflows of $22.7bn in the year to date.
"Emerging market fundamentals remain relatively robust and, compared to developed markets, emerging market countries have lower levels of indebtedness and more impressive levels of economic activity," Donald continued.
"Emerging market corporate profitability remains at premium levels compared with the developed markets, as has been the case for over a decade. Despite this pattern, emerging market equities are trading below their 10-year average on the basis of price-to-earnings and price-to-cash flow, as are developed market equities."
However, Donald, who is one of the top-three best-performing managers in the entire IMA universe over the last decade, warns that an escalation of the sovereign debt crisis could see a repeat of last year’s disappointing returns.
"Should Greek restructuring be interrupted or should issues intensify over either Italy or Spain, global risk aversion will almost certainly rebound. As was the case in 2011, negative sentiment about global growth could easily put pressure on emerging market stocks, despite their better fundamentals relative to stocks in developed countries."
FE data shows that Donald weathered the global flight from risk assets better than the majority of his peer group. In 2011 the Lazard Emerging Markets fund lost 17.52 per cent while the average fund in the Global Emerging Markets
sector lost 19.02 per cent.
Over the last decade the fund has returned 299 per cent, only the now soft-closed Aberdeen Emerging Markets and First State Global Emerging Markets funds have a better record.
Performance of funds vs sector over 10-yrs
Source: FE Analytics
One of the major risks that is worrying emerging market investors is the possibility of a hard landing in the Chinese economy following a tightening of monetary policy. The news that the Chinese growth rate fell to 8.1 per cent has raised fears that the region will suffer a sharp deceleration.
Donald, however, says that this dip in growth is perfectly reasonable and overall GDP performance should be boosted by improving demographic trends.
"Thus far, the People’s Bank of China appears to have succeeded in taming inflation in overheated parts of the economy, such as real estate, while also tempering the risk of an abrupt slowdown," he said.
"China’s economic structure is also transforming slowly but surely. Not only is domestic demand becoming an important component of economic growth, but also China’s exports to developed economies are moderating as trade with other emerging markets grows."
The manager says that his bullishness over the last three months has turned more sanguine following strong share price performance in the year to date. Any flight from risk assets off the back of eurozone or China hard-landing fears is likely to be seen as a strong buying opportunity.
"We continue to see a greater chance of reasonable appreciation in emerging market equities relative to their developed market counterparts, as has already been demonstrated to an extent thus far this year," Donald finished.