Emerging markets have been hit hard in the recent worldwide share price turmoil, with some falling by more than 30 per cent. But is this a wake-up call to investors to get out of the riskier parts of the globe or should it be seen as a buying opportunity? John Chatfeild-Roberts, who heads the team managing Jupiter’s multi-manager funds, says: “In most markets, when the price of a product falls, it is a signal to buy rather than sell. Emerging markets now look quite cheap after the recent sell-off.”
His view is shared by Mark Dampier, head of research at Hargreaves Lansdown, the independent financial adviser. Mr Dampier says that a correction was only to be expected after emerging markets had, on average, more than tripled in value in the past three years.
He says: “They were due for a sell-off after such a sharp rise. But I remain fairly bullish about emerging markets. They are still trading on valuations of about ten times earnings, compared with 14 or 15 times earnings in many of the most developed economies. We are nowhere near the bubble territory of 1994.”
So which regions appear tempting right now? Mr Chatfeild-Roberts likes the look of Russia, despite Moscow’s recent sharp fall. “Russia is still up this year overall by about 10 per cent,” he says. “It is continuing to enjoy the benefit of a high oil price, huge current account surplus and large foreign currency reserves.”
Mr Dampier adds: “Russian stocks are not very expensive. Most oil and mining shares are trading on valuations of less than ten times earnings. Funds that are well placed to profit from future Russian growth are the Jupiter Emerging European Opportunities fund and the Neptune Russia & Greater Russia fund, but they are only for those prepared to take a long-term view and who have a strong appetite for risk.”
Mr Chatfeild-Roberts also sees signs that the Chinese stock market could, at last, be starting to convert the country’s dramatic growth in gross domestic product into shareholder value. He says: “Over the past ten years economic growth has averaged close to 10 per cent a year, but the local stock market has gone nowhere. But this year the local market is up by about 40 per cent, while Hong Kong, often seen as a proxy for China, is up by only 3 per cent.
“It is a white-knuckle ride, but if you are prepared to take a longer-term view, you could reap rich rewards from funds such as Melchior Greater China Opportunities and Invesco Perpetual Hong Kong and China.”
Mr Dampier prefers to tap into China’s growth in an indirect fashion by using an emerging markets fund. He favours First State Global Emerging Market Leaders and Aberdeen Emerging Markets. He also likes the look of Templeton’s Emerging Markets investment trust, run by Mark Mobius.
John Hatherly, an investment commentator, says that emerging markets are still attractive, but investors should be aware of the currency risks. “It was noticeable that many of the sharpest recent falls occurred in countries such as Turkey, India and South Africa, where falls in share prices were made even bigger by declining currencies.”
Some countries are a safer bet than others, says Magnus
Investors in emerging markets could be forgiven for wondering what has “emerged” other than trouble in the past few weeks. Shares in these distant markets have tumbled much farther than those closer to home.
But emerging markets is a catch-all phrase that hides wide disparities. For instance, while the MSCI India index has slumped by 30 per cent since May 10, when shares generally fell out of bed, the equivalent stock market measure for Malaysia is down by about 10 per cent.
Kathryn Langridge, who manages Invesco Perpetual’s International Equity fund, says: “It is hardly a homogenous group of markets. It is a strange asset class that groups together Peru, Poland and the Philippines. It really is a ragbag of countries that covers a broad spectrum in terms of the level of income, development and liquidity, and levels of corporate governance.”
John Hodson, of Taube Hodson Stonex, a fund management group, says: “I think that there are definitely some markets that are better than others.” He cites Chinese companies that are registered in Hong Kong. “They do seem to have better corporate governance than companies registered only in China. They have to go through more regulatory hoops in Hong Kong than they would in China itself, so we tend to invest in those companies as a result,” he says.
Mr Hodson says that corporate governance and politics are both pitfalls for investors in emerging markets. He names Russia as an example. “With big companies there is now a degree of corporate governance, but with smaller ones there is not much yet. Also in Russia there are nationalist tendencies. There has been talk in the press recently that one faction in the Kremlin has been saying that Shell and BP’s assets ought to be taken back into Russian ownership.”
In India, a number of investment professionals believe that the market still looks overvalued, even after its recent slide. But John Lomax, emerging markets analyst at HSBC, the investment bank, says that the real issue for investors in all these areas is what happens to the US economy.
“Most people think that a hard landing in the US would hit growth in China and India and there would be a knock-on effect on commodities. Emerging markets are closely correlated to commodity markets,” he says.
In that case, you would not want to be in an emerging, or any, equity market. However, a “soft landing” in the US would be better news, he suggests. In that case, commodity producers, such as Russia and Brazil, would do better than importers, such as Taiwan and South Korea.
So would-be investors in emerging markets would do well to wait until the economic picture has cleared. And remember that some are safer bets than others.
