Don’t expect economic growth to translate into emerging market equity returns: that’s the warning from one of Australia’s investors as stock valuations begin to look more attractive.
Joshua Bloom portfolio manager of Sunsuper described the five years up to 2003 as “quite special” and a boom that could not go on indefinitely into the future.
“We had a short period of outperformance that was extrapolated into the future, but it wasn’t sustainable,” he said.
Sunsuper increased its exposures to emerging markets through the early 2000’s and beyond, dedicating 30 percent of their global equities allocation to emerging markets from 2011.
Since then the actions of the European Central Bank to bolster Euro markets caused a flight from emerging market and saw the S&P 500 rise 29.6 percent. However, following developed world equity rallies, emerging market equity valuations are comparatively cheap and may potentially entice investors back into the market.
Bloom recognised valuations are compelling but cautioned others against expecting hegemony from “lumping emerging market countries together” and from assuming equity returns to be correlated to domestic economic growth.
“Our learnings are, you can’t just take economic growth for granted… even if you do, you can’t just expect great equities performance.”
Other issues institutional investors have traditionally faced in emerging market equities include liquidity constraints, but as emerging economies quickly develop so too may considerations about the level of diversification investors achieve versus developed world equities. Talking to 30 superannuation fund CIOs and asset consultants at the Conexus Fiduciary Investors Forum last week, Bloom highlighted the need to maintain caution around transparency and governance in investing in stocks subject to government control.
“They’re [emerging markets] becoming more and more like developed markets, but they’re different, particularly with those stated-owned enterprises. There’s the risk that you could start to ignore or forget about those governance factors… You can’t have complacency about it, and we as investors need to remember that,” he said.