Why we remain optimistic about prospects for emerging markets
• Challenge is to not be put off by the noise and instead focus on long-term growth of equities
Politicians are notorious for their campaign promises and their inability to keep them. However, more than 500 days into Donald Trump’s presidency, it appears the man who promised tax cuts, a tougher stance on illegal (and legal) immigration and better negotiated trade deals, may actually be on track to achieving a few of his promises.
In doing so, however, he has left destruction, chaos and confusion in his wake, particularly for emerging markets that feel the pressure of a strengthening US dollar, higher interest rates, and looming trade wars. Trump did warn us, though; we simply didn’t believe him.
At times like this it’s important to revisit why we urge clients to invest in emerging markets, which comprise clear structural advantages over developed markets, such as large, young and growing populations; the fastest growing economies in the world; and the fastest growing middle class.
These structural advantages are already resulting in – and will lead to further – rapidly rising consumption and growth in incomes and wealth.
At the other end of increasing wealth and income are goods that consumers spend that income on.
Those goods are manufactured, produced and sold by companies. So, simply put, if we identify companies that can, and will, benefit from these longterm emerging market structural growth advantages and then invest in them, our clients can anticipate strong returns from their investments.
As asset managers, we could get caught up in the news about rising rates, uncertain politics, tapering central bank balance sheets, the “fragile five economies” and weakening emerging market bonds, equities and currencies. Over the short term, these topics are likely to continue to dominate the headlines and will affect (as they currently stand) asset prices in emerging markets.
FREQUENT CRISES
However, as long-term and experienced investors in emerging markets, we are very familiar with the frequent crises experienced by these economies. Our job is to look through this noise and seek out those companies that are able to thrive during such times, even though the market may not favour them, and whose share prices have been unnecessarily sold down in times of uncertainty.
There are 24 countries in the MSCI Emerging Markets Index and at any point in time there is bound to be some form of crisis in one of these countries that sends investors running for cover. The longer-term outlook, however, paints a more reliable picture of exciting opportunities and the potential to achieve better investment returns.
As investment professionals, our aim, and commitment to our clients, is to generate superior long-term returns by investing in attractively valued, quality emerging market companies with sound corporate governance. The short-term volatility allows us the rare opportunity of buying very strong businesses at highly attractive valuations.
We remain optimistic about the long-term prospects for emerging market equities, particularly relative to developed markets, given their attractive demographic dynamics (which structurally boost long-term growth prospects) and improving profitability.
Emerging market equities are also attractively priced, trading at a discount to developed markets on a price-to-earnings and price-to-book basis.
However, we believe it is not possible, or desirable, to try and time the market and thus it is best to make investment decisions that take a long-term view for emerging markets, rather than reacting to shortterm volatility.
As such, patient investors would do well to accumulate emerging market exposure during times like these — when quality assets have sold off significantly and thus offer compelling value and the prospect of delivering decent returns up to five years out.
THE LONGER-TERM OUTLOOK PAINTS A MORE RELIABLE PICTURE … TO ACHIEVE BETTER RETURNS