Source: FactSet,
Source: FactSet, DataStream, Bloomberg, Goldman Sachs Global Investment Research. All figures are daily USD total returns since 1970 EMERGING MARKETS Short-term risk for rewarding results Despite the negative sentiment of 2018, volatility provides opportunities for long-term returns The US/China trade war and political events across the world have driven negative sentiment towards the global emerging market sector. Volatility is a characteristic of emerging and frontier markets, and one that provides opportunities for longterm returns. For investors, the most crucial lesson is therefore to remain patient despite the shorter-term uncertainty. Emerging markets have attractive valuations and benefit from powerful long-term growth drivers Why should you consider an investment in emerging markets? Emerging markets are currently attractively valued because they have de-rated considerably relative to developed markets. They are also the beneficiaries of powerful long-term growth drivers. Emerging markets now have the lion’s share of global GDP and the International Monetary Fund (IMF) expects emerging markets and developing economies’ share of GDP to increase at an even faster pace going forward. As countries move up the development curve their stock markets typically grow. This results in a rising ratio of market capitalisation to GDP. Put simply, emerging market stocks should continue their long-term trend of outperformance going forward. The IMF expects emerging markets and developing economies’ share of GDP to increase Source: IMF A number of other factors bode well for emerging market growth 1. Positive demographics and rapid urbanisation Unlike developed markets where ageing populations provide strong headwinds to economic growth, emerging market economy populations are typically much younger and grow at a faster rate. The trend of rapid urbanisation is also very positive because growing cities tend to dominate global economic activity and have considerably higher disposable incomes and wealth. If emerging markets can support their demographic and urbanisation advantage with good economic policies as well as access to education and healthcare, they can unlock what is known as their ‘demographic dividend’, which will be a powerful driver of future growth. 2. An abundance of natural resources 3. Optimal diversification benefits Historically, emerging markets have been excellent diversifiers. Although emerging markets generally remain somewhat more volatile than developed stock markets, investors should be able to achieve greater diversification benefits and improved risk profiles over time by adding emerging markets to their portfolios. The following table looks at how adding emerging markets to a portfolio can deliver better longterm risk/return outcomes. Diversifying a portfolio with emerging markets offers the possibility of better risk/return outcomes A great diversifier Emerging markets - excellent diversification benefits 1 MSCI EM 15 909%* 10.9% p.a. MSCI World 1 793%* 6.2% p.a. 14 www.bluechipjournal.co.za
Source: FactSet, DataStream, Bloomberg, Goldman Sachs Global Investment Research. History shows that if you embrace the risk and vola4lity in emerging markets the rewards EMERGING MARKETS Most emerging markets bounced back strongly in January After a difficult December where most major indices declined into bear territory, markets around the world bounced back strongly in the first month of 2019. The interesting part was which markets did best: Brazil was up 18% for the month, Russia was up 13% in dollar terms, and the MSCI China Index showed substantial growth, despite all the talk of a slowdown in that country’s economy. Out of the key emerging market economies only India was relatively flat. The other three major emerging economies all outperformed developed world markets. A bounce back from depressed levels? Possibly. But it also might be the sign that something more interesting is starting to happen. The greatest turnaround potential seems to be in Brazil Much criticism has been aimed at the new president, Jair Bolsonaro, but the finance minister, Paulo Guedes, is a free-market liberal who has promised a tough programme of privatisation and reform. He plans to bring the budget back under control following a decade of irresponsible spending and economic mismanagement. He has also vowed to sort out the pension system and return a raft of major industries to the private sector. Russia is rising again, and India continues to develop rapidly with progressive tax reforms Although expansion forecasts of just under 2% for Russia this year are still fairly dismal, it’s at least a positive move forward. With the US beginning to lift some of its sanctions, there’s a possibility of Russia growing stronger again. India continues to develop rapidly, expanding by 7.5% in 2018 and with a similar growth rate expected for this year. Prime minister Narendra Modi has just pushed through some of the biggest tax system reforms in the country’s history. These include a massive simplification of federal and state taxes, a doubling of the amount earned before income tax is payable, and a shift to direct sales taxes. This may well free India from a once overbearing and bureaucratic government. China is set to expand by 6-7% Every CEO in the world is blaming China for a slowdown and softening profits, but the fact remains that China will expand by a further 6-7% this year, in line with performance over the past five years. Industrial production is stable, and a buoyant stock market is allaying fears of an imminent collapse. The current favourable prices of emerging market companies are exciting for long-term returns When you invest, the price you pay for an investment is critical to generate long-term returns. Constructing a portfolio of highquality industry- and sector-leading businesses that are run by superior management teams are two critical factors. However, good companies like this don’t often become available at a price that is attractive. This is currently Nigel Barnes, Head of business the position that emerging markets are in, development, Denker Capital The which current provides favourable exciting prices upside of emerging potential market over companies are exci4ng for long-term returns the next few years. Examples are businesses Looking ahead: volatility creates When The current you invest, favourable the price prices you of pay emerging for an investment market companies is cri3cal are to generate exci4ng for long-term returns. such as Construc3ng Samsung and a porUolio Alibaba of (the high-quality Amazon of industry- opportunities and sector-leading for active businesses investment that are When China), run you by where superior invest, one the management can price clearly you see pay teams the for an declining are investment two cri3cal managers is factors. cri3cal to However, generate to create good long-term wealth companies like returns. price this trendline don’t Construc3ng oVen and become the a porUolio beginning available of high-quality of at a a positive price that industry- is If aFrac3ve. everyone and sector-leading This plays is currently their businesses the part, that there is no posi3on are run by that superior emerging management markets are teams in, which are two provides cri3cal exci3ng factors. upside However, poten3al good companies over the next few like recovery this years. don’t in Examples the oVen early become are weeks businesses available of 2019. such at a as price Samsung that is and reason aFrac3ve. Alibaba why This (the is the Amazon currently improvement of the China), in the where posi3on one that can emerging clearly see markets the declining are in, which price provides trendline performance exci3ng and the upside beginning poten3al of of the a posi3ve over emerging the next market recovery few Samsung’s years. in Examples the downward early are weeks businesses of trend 2019. such as Samsung and sector Alibaba cannot (the Amazon be maintained. of China), This will where one can clearly see the declining price trendline and the beginning of a posi3ve Samsung’s recovery appears in to downward the be early turning weeks trend of appears 2019. to be turning allow active managers the opportunity to search the emerging world and discover Samsung’s downward trend appears to be turning strong investment opportunities to build wealth. However, it’s important to remember that it certainly won’t be without some volatility, so be prepared and wait patiently for your reward. Source: factset Source: factset There Source: are factset signs of a recovery in Alibaba’s price There are signs of a recovery There in Alibaba’s are signs price of a recovery in Alibaba’s price Source: factset History shows that if you embrace the risk and volatility in emerging markets the rewards come Outperforms developed markets Short-term volatile, but long-term outperform EM compared to DM Relative equity performance index in log terms MSCI MSCI EM World 15 909%* 1 793%* 10.9% p.a. 6.2% p.a. Looking Source: factset ahead: vola4lity creates opportuni4es for ac4ve investment managers to create wealth Source: factset 2 If Looking everyone ahead: plays vola4lity their part, creates there opportuni4es is no reason why for the ac4ve improvement investment in managers the performance to createof the wealth emerging market sector cannot be maintained. This will allow ac3ve managers the opportunity If everyone plays to search their the part, emerging there is no world reason and why discover the improvement strong investment the opportuni3es performance tof build the emerging wealth. However, market sector it’s important cannot be to maintained. remember This that will it certainly allow ac3ve won’t managers be without thesome vola3lity, opportunity so to be search prepared the and emerging wait pa3ently world and for discover your reward. strong investment opportuni3es to build wealth. However, it’s important to remember www.bluechipjournal.co.za that it certainly won’t be without some vola3lity, so be prepared and wait pa3ently for your reward. 15
