Emerg­ing mar­kets in­dus­try sinks into post-boom soul search­ing

The Pak Banker - - 6BUSINESS -

Af­ter the dot­com bub­ble and the global credit crunch, it's the turn of the emerg­ing mar­kets in­dus­try to sink into post-boom soul search­ing. The near ma­nia that once flab­ber­gasted even emerg­ing mar­ket spe­cial­ists is gone. Now many of the firms that grew to serve in­vestors in the likes of China, Brazil or South Africa are slash­ing their busi­nesses and jobs, with more cuts to come.

If proof were needed that global in­vestors have gone off de­vel­op­ing economies, it came in Tues­day's an­nounce­ment by Bar­clays that it is pulling out of Africa af­ter more than a cen­tury.

The Bri­tish bank's African sub­sidiary in­sisted the de­ci­sion to with­draw un­der a makeover of the Lon­don-based par­ent did not re­late to eco­nomic sen­ti­ment on the con­ti­nent.

But sen­ti­ment among in­vestors in emerg­ing mar­kets gen­er­ally has been sour­ing for some time; in dol­lar terms, emerg­ing eq­ui­ties un­der­per­formed their de­vel­oped peers by around 50 per­cent in the five years from the end of 2010.

Com­pare that with the mood just be­fore the mar­ket peaked half a dozen years ago.

More ad­ven­tur­ous in­vestors had long poured into emerg­ing mar­kets (EM) - es­pe­cially coun­tries ex­port­ing then boom­ing com­modi­ties - seek­ing bet­ter re­turns than in de­vel­oped economies where in­ter­est rates were near rock-bot­tom. But to the as­ton­ish­ment of mar­ket pro­fes­sion­als, even some pen­sion fund man­agers - the tra­di­tion­ally ul­tra-con­ser­va­tive guardians of peo­ple's re­tire­ment in­comes - wanted to join them.

De­van Kaloo, head of emerg­ing eq­ui­ties at Aberdeen As­set Man­age­ment, re­calls a con­ver­sa­tion he had with a Euro­pean pen­sion fund in 2010: it wanted to put no less than 80 per­cent of its as­sets into a sec­tor that a few years ear­lier had been con­sid­ered too risky for main­stream in­vestors. "I am an EM guy and I should have been jump­ing up and down and say­ing 'yes ab­so­lutely' but even I was think­ing: ' se­ri­ously'?" he said. Kaloo ad­vised against such a move, and the con­ver­sa­tion with his fund at least went no fur­ther. "I just hope they didn't do it," he added.

Kaloo runs one of the sec­tor's most suc­cess­ful funds; it de­liv­ered av­er­age an­nual re­turns of al­most 20 per­cent in the decade af­ter its 2003 launch, far out­pac­ing the un­der­ly­ing emerg­ing in­dex. But some time af­ter the 2010 con­ver­sa­tion, Kaloo "soft-closed" his fund - not mar­ket­ing it and charg­ing new in­vestors ex­tra fees upon en­try.

"EM be­came so much in vogue that we had in­vestors com­ing to us who per­haps didn't un­der­stand the as­set class; they looked at our track record and ex­trap­o­lated that for­ward. We wanted to re­bal­ance the book and to bet­ter cherry-pick clients," he said.

Lit­tle did they know but emerg­ing eq­ui­ties' boom decade was draw­ing to a close. Hav­ing risen more than 200 per­cent from 2001, the main in­dex run by MSCI fell 35 per­cent in the sub­se­quent five years.

Kaloo's fund has not been spared as in­vestors fled the prob­lems of emerg­ing mar­kets - such as div­ing oil prices for en­ergy pro­duc­ers from Nige­ria to Rus­sia or political in­fight­ing in the likes of South Africa - and re­turned to de­vel­oped mar­kets in the hope of re­viv­ing re­turns.

Its as­sets un­der man­age­ment ( AUM) are down to $5.1 bil­lion from $16 bil­lion in 2013. Aberdeen As­set Man­age­ment's over­all AUM fell by $30 bil­lion last year, mainly due to its EM-heavy pro­file. Across the in­dus­try, $26 bil­lion fled emerg­ing equity funds last year, ac­cord­ing to Bos­ton-based EPFR Global, a size­able chunk of the net $153 bil­lion in­flows re­ceived be­tween 1996 when data track­ing be­gan and now.

Rus­sian Pres­i­dent Vladimir Putin de­liv­ers a speech dur­ing a congress of the Cham­ber of Com­merce and In­dus­try.

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