Emerging markets debate takes shape

InvestmentEurope’s first Conjecture* debate brought together experts in the field of emerging markets to debate the macro, micro and technical arguments in favour of this asset class.

Joining the panel were Jeffrey Casson (JC), portfolio manager Global Emerging Markets at Martin Currie, Ajay Dayal (AD), investment director at Legg Mason Global Asset Management, and Alec Young (AY), Equity Market strategist at Standard & Poor’s by telephone from New York.

The discussion started off by asking the panelists for their views on the next big emerging market opportunity.

Alec Young: We have got to call them as we see them, and in terms of bullish opportunities, right now I think the best opportunities lie in the fixed income side.

We really see the sovereign situation in Europe keeping global risk aversion fairly high, which tends to be a negative for higher beta asset classes like emerging market (EM) equity.

Ajay Dayal: I do agree to a certain extent, they [bonds] are looking very attractive.

But I think it would be an omission to avoid the emerging market secular story. In many ways, when you see these kind of pull-downs in equity markets that we are seeing today, it is actually time to re-evaluate positions in emerging markets and look at the broader picture.
 
Jeffrey Casson: I think there are two distinct differences there. One, we have got the bond market telling us one thing about emerging market countries.

When you look at the flows into emerging debt funds, they have been exceptionally strong, which really does indicate the view that emerging markets are in a slightly better position than they have been historically.

Yet, we have the complete opposite situation in the equity market where EM equities have been one of the poorest performing asset classes this year to date.

We have a complete disconnect between what is happening in the underlying economic fundamentals versus what the market wants to pay for those as equities.  

Is it becoming easier to invest as governance improves, or as local stock markets continue to develop the services that they offer investors?

AY: I think it is important to remember that what is going to move markets is information that is not priced, that is not discounted.

And by definition, what you are talking about is known and discounted.

Russia is the poster child for transparency problems. It trades at six times earnings.

So, the concerns that you raise are well discounted by institutional investors. It is the reason for the traditional valuation discount that you see in emerging relative to developed markets. 

If the situation stays the same, it is in the price. If it gets better, which we think it will from a secular perspective, that can lead to P/E expansion and longer term, you may actually start to see premiums in valuations in some of these markets, relative to the developed markets.

AD: I think the fact that Asia has often acted as a high beta player, warranting beta for global growth concerns, is undoubted.

And when global growth concerns are spiking higher, emerging markets will come off. We have seen that. 

Interestingly, it is not always the case that when global developed markets fall, emerging markets will do worse.

July was proof in point, where actually the MSCI fell but actually the MSA emerging markets did a third worse, or a third better in the sense that it did not drop as much. 

 

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