Focus on emerging markets
Investors must look at markets with high domestic consumption
S markets scaled new peaks last week but emerging markets have been in a tailspin, but that’s not worrying fund managers.
Participants like UTI International and Emirates NBD Asset Management have been placing their bets on certain emerging markets with strong domestic consumption.
“There are a number of key opportunities in emerging markets. Higher growth leads to higher equity market returns, while lower yields in most developed markets have meant that money has flown to emerging markets in the hunt for higher yields,” said Usman Ahmad, Managing Director, Investments, Emirates NBD Asset Management.
In the emerging markets, growth is predicted to increase from 4 per cent in 2015 to 4.7 per cent in 2017.
“Other positive signs for growth are loosening policy, low levels of developed market activity and a recent stabilisation in currencies. There is also strong productivity potential from young and aspirational demographics,” said Ahmad.
Praveen Jagwani, chief executive officer at UTI International agrees with Ahmad.
“Funds would chase growth stories in emerging markets, which are not export dependent. The domestic consumption would remain a strong driver, which means large populations that means India, Indonesia and Mexico to an extent,” said Jagwani.
India’s most-watched Sensex index has been mostly steady since the start of the year, as against a 7 per cent rise in the Dow Jones Industrial Average, but fund managers advise investors to brace for opportunities, but at the same time stick to basics.
“In India buying small and mid-cap is risky. Investors should stay with strong companies with strong management, strong business models. It’s back to the basics. Investors should preserve capital rather than try to outsmart and time the market. It’s not the time to be extra clever,” Jagwani said.
Investors have been very nervous, and this is evident from the volatility that the markets have witnessed in the short to medium term.
“There has been an aggregation of capital since the financial crisis. The pressure is on the pension fund managers to generate extra returns,” said Jagwani.
Negative returns
About $33 trillion (Dh121 trillion) of debt is generating negative returns, China struggling with growth, and Japan suffering from skewed demographics, the question is where do investors hunt for yields.
And this is driving a lot of fund managers to invest rather than to sit on cash. According to Bank of America Merill Lynch, cash levels slumped from 5.8 per cent to 5.0 per cent in November even as they feel that allocators have room to raise equity weightings in coming quarters.
But fund managers are closely watching every word and action of the US president-elect Donald Trump.
The incoming administration in the United States has threatened to exit many trade deals, and plans to formally exit the 12-country Trans-Pacific Partnership trade deal.
“The ability for any US president to change any economic and foreign policy is very limited. Globalisation is deeply entrenched, if we serve to isolate America as we saw in the case of Brexit, the UK would tend to lose more than Europe and similar to the US,” Jagwani said.
“If Trump would follow up on fiscal spending, that is build infrastructure and create more jobs in America, that would have an knock-on effect on imports, the commodity cycle, so in that case exporting emerging countries would also do well.” said Jagwani.
However, fund managers feel that, investment decision should be taken on a long-term basis.
“Investors should diversify, diversify ... In the backdrop of an Italian referendum, and French elections, there is so much uncertainty baked in. Investing in good solid companies that have negotiated in various business cycles. This is not the time to be opportunistic,” said Jagwani.
Attractive
In the local markets, the various legislations to spruce up revenues would make the UAE, and other markets in the Gulf attractive, fund managers say.
The government has taken many measures to increase revenues, and also plan to implement Value Added Tax in the medium term. Even Saudi stocks are looking attractive, according to Emirates NBD Asset Management.
“Valuations [in Saudi Arabia are] at trough levels. On a price/ book basis, Saudi is trading at 1.5x which is near historical lows,” Emirates NBD Asset Management said in a note.
The Dubai Financial Market General Index has gained 5.49 per cent since the start of the year, leading the regional gains, while the Tadawul index fell by more than 1 per cent in the same period.