The emerging market growth story: Is it due a comeback?
EMERGING market investors saw spectacular annual returns of around 30 per cent between 2003 and 2007. Over those four years, the developing world enjoyed a virtuous cycle of strong commodity prices, high capital inflows, strong currencies and falling inflation. That cycle is now working in reverse – emerging markets have underperformed developed markets by 50 per cent since 2011.
The relative outperformance of emerging over developed markets was highly correlated with Chinese growth. Now that China is no longer targeting growth at any cost, what does this mean for the future of emerging markets?
Another factor to take into consideration is oil. Falling prices are not going to help oil producers like Brazil, Russia and Venezuela, but may aid growth for commodity importers like China, Taiwan and, of course, India.
There is also a process of de-globalisation happening, with Western companies clawing back production that was previously outsourced to emerging markets, now that the cost of doing so is less attractive.
THE EMERGING OPPORTUNITIES
When looking for emerging market exposure, my tip would be to go for a country with a large population that can sustain strong demand. Another key aspect is a low level of income per capita. Income per capita in India, for example is $1,500 (£946), and $7,000 in China, compared to an average of $37,000 in developed economies.
Access to natural resources is also essential, as are personal freedoms and an aspirational lower and middle class. To represent a real opportunity, countries need stable, transparent and evolving political systems with technocratic institutions.
We hold Indonesia as a case in point. The market has seen steady gains over the past year, helped by the ambitions of the new reformist President Joko Widodo, as well as slowing inflation and a stable currency.
Alongside India, we think it is the best placed of the so-called “fragile five” economies (Brazil, India, Indonesia, South Africa and Turkey). In Turkey and South Africa, currency troubles and high inflation have blighted progress. But Turkey, which imports 90 per cent of its oil and gas supply, is likely to benefit from lower oil prices.
It’s important to assess each emerging market on a case by case basis. They all have different issues that can affect their projected growth, as well as differing levels of dependence on more “established” markets like China.
At some point, the strong dollar, and lower oil and transport costs will make the emerging markets case compelling again.
But we believe that holding a globally diversified portfolio, with exposure to a wide range of equities and bonds, remains the best path to stable returns.
Shaun Port is chief investment officer at Nutmeg.www.nutmeg.com