The variance in performance among emerging market economies is now the greatest some experts have seen in their careers, and choosing the best-performing countries and currencies is now arguably more important than stock selection in maximising returns from EM assets.
Joaquim Nogueira, investment manager at GAM, said the widespread view among fund managers that the economic cycle was nearing its end “doesn’t apply to most emerging markets” and that EM assets could provide crucial diversification, despite their volatility.
“The differentiation in the asset class is the strongest it ever has been,” Nogueira told the Fiduciary Investors Symposium at the RACV Healesville in Victoria on November 2. “The stories are completely different, whether you’re talking about Turkey, China, Taiwan, Korea, Brazil, Russia.
“They are completely counter-cycle, especially in terms of the central bank and the interest rate cycle; most of them suffered from inflation up to two years ago.”
Many have suffered the effects of hyper-inflation in recent history so their central banks tended to be “very orthodox” in raising rates to stamp out inflation early.
Nogueira spoke during a panel discussion titled “Emerging Markets: Uncertainty versus hidden potential”.
“They have done their sacrifices and we’ve seen across several economies all sorts of tightening and now they are in the opposite side of the cycle,” he explained. “For most of these countries, the inflation came under control and now they are in a position where they can be reducing rates. So they have means to support their economy – and to stimulate – that developed markets don’t have.”
While it was hard to make investment decisions based on political developments, politics “definitely count” in some emerging market regions, such as Latin America.
“We’ve seen Brazil going up, in October, 17 per cent, and Mexico going down 18 per cent,” Nogueira said. He said “the reason was mainly politics”, owing to the fundamentally different business approaches of their respective leaders.
Stock selection is important but “the name of the game” is choosing the right countries and currencies at the right time, he said.
Jamie Grant, head of emerging markets and Asian fixed income at First State Stewart Asia, told the symposium that political tensions were relatively calm in Asia, compared with many developed markets at the moment.
“When politics is a driving factor, that makes it very difficult for investors, and it’s not the case in Asia,” Grant said.
Chair of the discussion, JANA senior consultant Jeremy Wilmot, asked Nogueira and Grant – who manage emerging market equities and emerging market fixed interest, respectively – what their asset classes offer to a multi-asset class portfolio, given their extreme volatility.
Nogueira said emerging market investments at their different stages of the economic cycle could ease concerns asset owners have that the end of the economic cycle is near. Emerging market equities had fallen to lows not seen since 2016, he said, spelling opportunity for the well-informed.
“The entrance right now into emerging markets – specifically the equity side – is very attractive,” Nogueira said. “Due to all this noise on the trade war and the stronger dollar, we are being given a second entrance point in emerging equities that I thought wouldn’t be there.”
Grant said emerging markets offered exposure to more than 60 different countries “at all points on the curve” and gave diversification in yield. Most pension funds in Asia were willing to look past the volatility, he said.