Skagen sees investment opportunities in EM misconceptions, says Kristoffer Stensrud
Skepticism in the consensus on emerging markets is opening up future opportunities for long term investors, suggests Kristoffer Stensrud, one of the co-founders of Norwegian manager Skagen and portfolio manager on the Kon-Tiki equity fund.
SKAGEN believes the lines dividing countries historically seen as ‘developed’ and those classed as ‘emerging’ are becoming increasingly blurred as a result of:
• Much of today’s economic growth is taking place outside of North America and Western Europe, with nearly half a billion people having moved from poverty to middle class status. The resultant increase in emerging market consumer demand and shift from black market and shadow economies to more official financial systems should benefit both governments and companies operating in these countries.
• Many developing countries’ economies are sufficiently large and less dependent on exports to western countries, instead relying more on internal growth in sectors such as services, which typically account for upwards of 80% of value creation in industrialised countries. A good example of this trend is South Africa, which is perceived to be a commodity-driven, export-led mining economy but whose stock market is actually anchored in the service sector.
• The development of technology in emerging markets has allowed many to bypass various stages of progress undertaken by more advanced economies and to leap straight into the digital age. This could potentially result in drastic savings in resources, with growing numbers of people having direct access to smart-phones and internet-based tools which allow widespread sharing of information.
• The potential for political reform in the many developing countries holding elections in 2014. Several have had the same government for many years and even if the ruling party remains unchanged, an appetite for policy reform may increase, potentially creating significant positive structural changes.
The underestimation of emerging markets’ potential creates opportunities, particularly for value investors willing to take a long-term view, as they are able to access high quality companies that are often significantly undervalued due to a lack of research or popularity.
In spite of everything – the increased purchasing power, the development of the service sector, the spread of digital commerce, and the potential for an improved political climate – the consensus view among the investing public is one of scepticism towards emerging markets. This may well open up good investment opportunities in carefully selected companies in the future.