Dampier (pictured), head of research at the firm, thinks there is a case for fast-growing economies over the extreme long-term, but says that investors with a shorter-term time horizon need to review their exposure. "Emerging markets have been underperforming for a few years now, and I just think that they could continue to disappoint for a few more," he said.
"If you speak to Hugh Young or Angus Tulloch, who admittedly are pretty cautious at the best of times, there are some real concerns about emerging markets in general. Jonathan Asante at First State recently said he didn’t expect it to be a good time for them at all."
Performance of indices over 3yrs
Source: FE Analytics
"The problem is that emerging markets have become very fashionable as an asset class. If I told my marketing department in 2002 that I wanted to put more in emerging markets, they would have thought I was mad, but now they probably wouldn’t bat an eyelid if I said I wanted to put 50 per cent in them."
"As a long-term story, I still think there is a case for them, but over the medium-term? I’m not so sure."
"I think a lot of people may even be surprised themselves to see they hold 50, 60 per cent in emerging markets, which I don’t think is very clever. If you’re a young person and you’re putting money into a monthly savings pension plan then fine – in many ways you want emerging markets to lose money so that you can buy them at a lower price."
"However, if you’re a bit older and have made a lot from emerging markets, I’m not sure whether you would want to have such a big weighting to them."
Dampier himself holds the Templeton Global Emerging Markets trust and Newton Emerging Income fund in his personal portfolio, but says his weighting to the asset class is lower now than it has been for some time.
He points out that the expectation for returns coming from emerging markets funds have become "ridiculously high", and thinks investors may need to look elsewhere to avoid disappointment.
"The problem you have is that many of the countries are changing their model from an export one to a domestic one, but a lot of the domestic stocks have already gone up by a long way. This makes it difficult for these funds to make a lot of money," he said.
"People’s expectations need to be lower. I might well be wrong and they could do very well, which would be great, but investors shouldn’t expect the next 10 years to be as good as the last 10."
Performance of sectors over 10yrs
Source: FE Analytics
"I think at the moment, you need to be more selective. In Russia, valuations are incredibly cheap and speaking to [manager of the Jupiter India fund] Avinash Vazirani recently, it sounds like small and mid cap Indian stocks are at very, very low levels."
"There are other place investors can look at as well. Asia and emerging markets have been the place to be in the last decade, but maybe it’s the UK and Europe – where demand and expectations are lower – that will be the better places in the next few years."
"I just think there could be mean reversion, as is often the case. Investors need to remember that emerging markets were just about the worst place you could possibly be between 1994 and 2000, which shows that they’re capable of having much worse times."
Performance of sectors 1994 to 2000
Source: FE Analytics
FE data shows that the average fund in the IMA Global Emerging Markets sector lost 13.52 per cent between January 1994 and January 2000. Over the same period, the IMA UK All Companies and IMA Global sectors delivered 119.85 and 94 per cent, respectively.
Dampier adds that the severe lack of options in the IMA Global Emerging Markets sector as a result of the recent wave of soft-closures is yet another headwind for the asset class.
While he thinks many investors are currently over-reliant on emerging markets, Dampier believes that it is important not to get too hung up on asset allocation.
"The irony is that over the last 10 years, some of the UK funds I hold like Giles Hargreave’s [Marlborough Special Situations] have done better than the emerging markets funds anyway," he explained.
"Everyone tends to get asset allocation wrong anyway because it’s so bloody hard to do, so more and more I think the emphasis should be on getting the right managers."
"Yes, you should make sure that you haven’t got 80 per cent in one area, but finding quality managers is more important in my opinion."
FE Trustnet recently highlighted the improving sentiment surrounding frontier markets as an alternative to emerging markets.
