Vecht warns of emerging markets bubble
The BlackRock Frontiers manager says long-term earnings projections for the sector are often based on just a few years’ data and has likened the situation to the clamour for tech stocks in the late 1990s.
By Mark Smith, Senior Reporter, FE Trustnet
Monday June 18, 2012
An obsession with rapid-growth narratives in emerging markets could cause the asset management industry’s next major bubble, according to BlackRock’s Sam Vecht
The group’s director of emerging markets says that chasing fashionable trends and catchy acronyms is the fastest route to failure when investing.
"There is a clear danger in pushing stories that are either past their sell-by date, or, as is more common, based on extrapolations of just a few years' data into a long-term trend," he explained.
"Just as one wouldn’t extrapolate the rate at which a baby grows for the first five years of life for the following 80 years, one must be very careful when extrapolating growth rates within countries."
"There’s nothing wrong with a story so long as you pay the right price but unfortunately by the time people read about it in the media then it is often far too late."
He added: "The key question to ask is 'what is the price of the stock I am buying?' Sometimes the latest investment story serves only to justify the large premiums at which the stocks are trading."
History bears witness to the perils of such rapid-growth narratives and Vecht says investors would be wise to be sceptical of any story that seems too good to be true.
"We were told the same about technology stocks back in 2000," he continued. "The story was that we should all buy tech stocks because the people of the future will all be using touch-screens and voice-activated computers."
"That story came true, but we all know now that it turned out to be a disaster for many investors and for many of the companies involved."
Data from FE Analytics
shows that the FTSE All Share index fell 45 per cent from its peak in September 2000 just before the dotcom bubble burst to the point where the market bottomed out in March 2003.
Performance of index during dotcom crash
Source: FE Analytics
"It was the same with eastern Europe in 2002 when additional countries were about to join the European Union," Vecht added.
"Many investors and European corporates bought banks in emerging Europe at five- or six-times book but eventually faced big write-downs in 2008/09 when the companies bought didn’t live up to their billing."
"In 2007 BRICs and the commodities boom became the big story. We were told that these markets would dominate the world. They have done well and while they are certainly more important today, these stock markets have underperformed a lot of other emerging market regions."
It is from lessons like these that Vecht, who is lead manager on the closed-ended BlackRock Frontiers
and Eastern European
trusts, has learned not to trust the consensus.
"Investment stories are great for selling products but they are not the best place for your money," he said. "I say it time and time again, don’t buy the story."
One of the most popular themes within emerging markets at the moment is the growing importance of consumers but the fund manager says that, in general, he hasn't found many opportunities within the sector.
"We don’t dispute that there are going to be more consumers in China and India and the other emerging market economies in 10 years' time but that doesn’t mean you should buy all consumer stocks just because people have realised there are a lot of people living in China, especially at inflated values."
Where Vecht has found value is in the markets covered by his Eastern European Trust. Our data shows that the portfolio has returned 35.84 per cent since BlackRock took over the reins three years ago compared wih 28.74 per cent from the average fund in the European Emerging Markets IT sector.
Performance of trust vs sector over 3-yrs
Source: FE Analytics
"Emerging Europe has hardly ever been cheaper when compared to history. Our approach is to buy cheaply valued, well run and cash-generative companies in stable economies with good prospects," said Vecht.
"I’m not saying these markets are not without risk – all emerging markets have risk – but provided the region is not going to face concerted economic or political challenges then we believe that this exceptional value will express itself over the long-term."