Risk rewarded, for now
Emerging markets have certainly been in a sweet spot. If you had bought one of the three emerging market funds available in rand, the return in the year to date would have been between 15% and 19%, compared with about 9% from one of the stronger SA equity funds.
Coronation Emerging Markets is the clear top performer for now, and fund managers Gavin Joubert and Suhail Suleman have won some mandates from overseas clients — though investors should not forget that it lost more than a fifth of its value in 2015.
The wind is blowing in favour of these funds at the moment. The other choices are Old Mutual Emerging Markets, run jointly by Feroz Basa and Siboniso Nxumalo, and the Sim fund, run by Denker Capital’s Neal Smith.
The MSCI emerging markets index rose 3.8% in the June quarter, double the developed index.
As usual, country selection would have been critical. Poland was a top performer — I suspect it will soon graduate to the “main board” — and, in spite of some ugly political news, Turkey was also amazingly strong.
But Brazil and Russia were very poor performers.
Templeton’s Mark Mobius remains the leading authority on emerging markets, even though Coronation’s fund has often outperformed his. Much of the time all three locally domiciled funds have been ahead. An exposure to Naspers has certainly helped them.
But Mobius was a pioneer and must get credit for his courage in being the first serious investor in many markets. He says three factors have contributed to the recent strength of emerging markets: the encouraging economic data in China — as the country is so vast, this will always be a swing factor; investor inflows into these markets; as well as corporate earnings growth.
Political reasons
If Poland should have graduated to the developed universe, South Korea and Taiwan are overdue. There are political reasons that they have been held back. Mobius told me once it would have been pointless to promote South Korea only to find it stepped back again after reuniting with North Korea; a prospect that seemed more possible when we spoke 10 years ago than it is now.
But the full reunification of Taiwan with its motherland could take place at any time.
Meanwhile, South Korea and Taiwan give access to sophisticated technology business such as Taiwan Semiconductors and Samsung.
China will be an even larger part of the emerging market index next year when the mainland A shares are added by MSCI. Mobius says Internet-related businesses should be a core of China holdings, but don’t ignore the prospects for car sales and even retro entertainment such as multiplex cinemas;
“MSCI can be as much of a kingmaker as any ratings agency,” Mobius says.
There was a slump in Argentina’s stock exchange after the MSCI decided not to promote the country from the frontier market category to emerging markets. But it has hinted at upgrading Saudi Arabia, a large but illiquid market, to the emerging market index in June 2018. Mobius points out that this index sits on a historic p:e of 14.9 compared with 21.9 for the MSCI (developed) world index. Economic growth should be better. I think emerging markets should trade at a discount, as there are additional risks. We have seen in SA how quickly economic growth can disappear.
Companies based in emerging markets learn to live with uncertainty so their investors won’t pay a premium.
For now the wind is blowing in favour of emerging markets funds