Reports of an emerging market death have been greatly exaggerated
Emerging markets have been unloved recently.
Not only have they under performed their developed market peers over the past year, but last week saw the biggest withdrawal of money from the asset class since August 2011, with investors pulling $6.3bn (£3.9bn) of cash from EM equities in just seven days – roughly the equivalent of Kosovo’s entire GDP.
Fears over Chinese and Brazilian GDP growth and interest rate rises are mounting, not to mention concerns over the more lurid end of emerging market curve, with sharp rate hikes in Turkey and the decline of Argentina’s currency playing into investors’ worst fears about emerging market.
But the message coming out of the City’s biggest firms yesterday was that this narrative has been overplayed – the death of emerging markets has been greatly exaggerated.
Yes, emerging markets are struggling, but this is cyclical and will soon correct itself.
First up for the defense was Goldman Sachs. At a briefing in its beautiful art deco building on Fleet Street (the former home to the Daily Telegraph), the firm's head of Global Portfolio Solutions International at its asset management division said investors should take a long term view on emerging markets.
“We haven't seen institutional abandonment of the asset class. Institutions have been sticky with holdings and are taking a long term perspective,” Kathryn Koch, head of Global Portfolio Solutions International at Goldman Sachs Asset Management, said.
“Most of the outflows seem to have come from retail investors. Our clients have largely remained involved and some are looking to buy. The problems in emerging markets are more cyclical than structural.”
These sentiments were echoed by Aberdeen Asset Management’s Devan Kaloo, the FTSE 100 firm’s global head of emerging markets.
“It’s natural, healthy adjustment,” he told a gathering of journalists at the company’s HQ today. “It’s not like in the west, where central bankers ride to the rescue. On the fundamentals of emerging markets, we’re still bullish, so we expect that money to come back.”
A cynic might say Kaloo was talking his book. He does, after all, run emerging market funds. But a few examples he provided backed up the statement.
Firstly, emerging markets have had a long history of health scares, going back to Asian crisis in the late 1990s and the collapse of Argentina’s banking system in the early part of the millennium.
Secondly, emerging market equities are significantly cheaper than developed market stocks, currently trading at about a 30 per cent discount on a price-to-earnings metric, compared to a 10 per cent discount just a year ago.
Also, extrapolating GDP growth to equity returns in emerging markets is misplaced. Equity performance in China and Russia has been so bad, but their economic growth has been so good. Yet a GDP slowdown is used as evidence that emerging markets are in trouble.
People on the ground clearly don’t share fears over emerging markets.
“Emerging markets are going through a bit of a parlance,” Icap chief executive Michael Spencer said earlier today. “But we remain pretty optimistic, we’ve seen strong volumes in rubles and rupees. From Icap’s point of view it’s a good scene for emerging markets.”