Managed funds: Max Riaz
Emerging markets have recovered after a tough few years, but further “wobbles” are on the cards
The start of 2021 brings with it the milestone of a record high for the emerging markets index (MSCI EM). This achievement can also be framed as a full recovery of the same index from its previous peak set in late 2007 just before the GFC took global markets by their focal point and gave them an almighty shake. While markets collectively recovered in 2014, emerging markets continued to suffer from a case of the wobbles despite the unshakeable economic growth of particularly the 25 major economies that significantly make up the index.
Our reading of the markets and discussions with various types of investors, from retail to institutions, suggests there is ongoing momentum towards emerging markets and flows are at a multi-year high. Nevertheless, it is time for investors to pause and ponder whether there is a risk of the EM index slipping back into the past multi-year bear cycles, or whether this is a genuine inflection point for them trekking onwards and upwards.
We are the first ones to concede our belief in the structural growth of the emerging market economies. Literacy rates are on the rise, populations are lifting out of poverty, diets are becoming more protein based, consumerism is on the rise, technology development and adaptation are setting new frontiers, infrastructure is seeing heavy investment and the population is generally younger than in the developed world. That’s the long and unwavering trend.
But in the short term, we see emerging markets as being more susceptible to acute risks such as the inflation and currency devaluation in Turkey and Argentina in 2018. Then there are political risks that can give frothy markets an easy topple, such as unresolved disputes involving India, China and the US.
For the time being, though, the report card on the management of the Covid-19 pandemic by Asian countries has been quite positive, in part because of their experience of other recent pandemics such SARs. The latest economic data for a range of countries in the EM sector are positive and expansionary, which bodes well for corporate revenues and profits.
The takeaway for investors is to see emerging markets as a growth story over the next 10 years, but be prepared for selloffs along the way, because this is an eclectic group of cultures and nations who at times don’t get along.