Emerging markets remain a lucrative source of return, especially when the health of developed markets is beyond understanding. This report is from the Investec Global Insights conference, where Funds Global was a media partner.
Michael Hugman contrasted the health of emerging market investments with the “very pervasive” uncertainty around inflation in the world’s developed markets – where forecasts are struggling to keep up with the unfolding reality. “The European Central Bank has hundreds of economists, but it is totally lost with what’s happening with inflation,” the Investec strategist told the Investec Global Insights 2014 conference. “You all need to think very hard about the possibility that we’re in a world where this kind of low inflation can be very permanent in certain parts of the global economy.”
Yet while the developed markets story may suggest a structural shift to lower global inflation and wage growth, Hugman asserted that emerging markets continue to provide refreshing levels of reassurance and certainty. Not only will they continue to grow in terms of their share of global GDP and market capitalisation, but their assets will continue to offer more opportunities for diversification, differentiation and actual value – even with the US dollar projected to strengthen over the next few quarters.
“Emerging markets are saving a lot more,” said Hugman. “Gross fixed investment is also better. “It’s a simple point... The fact that you save more and you’re investing more is going to continue to be a recipe for relatively high productivity growth, which will see emerging markets continue to grow their share of global GDP and global market capitalisation.”
When it comes to currencies, Hugman added that emerging markets have outperformed the euro and proven very stable against the yen. Currencies in countries like India, Korea and even Turkey have also performed much better than commodities, showing that inflation is under control in these emerging markets, while local currency bond markets remain very well supported by local and overseas investors.
Crucially, emerging markets also remain relatively free from the financial meddling that developed markets have suffered as a response to the scale of their debt stock. “To cope with the size of that debt stock in developed markets, we’re seeing a great deal of financial repression,” said Hugman. “We have nominal long-term interest rates at historic lows in the UK at the moment. You have to think very hard about the long-term value you’ll get from a portfolio that’s still anchored to those interest rates.”
By contrast, emerging markets’ outstanding debt is still much smaller than developed market debt relative to their shares of global GDP, while the past 18 months have seen a modest increase in aggregate real interest rates on offer in emerging markets, down to the fact that such repressive measures aren’t being repeated there. “The absence of repression in emerging markets means there’s still value across asset classes there in a fundamental sense,” said Hugman.
Anyone looking to invest in emerging markets will take comfort in the fact that established methods of macro-economic, credit and equity analysis still works as a guide there. By differentiating between economies on, for example, the credibility of their monetary policy and the productivity and quality growth that’s sustainable over time, an investor will be able to create a portfolio that adds real value.
“Unlike in developed markets, these kind of macro-economic fundamentals will really guide you over the long-term when investing in emerging markets.” Hugman said.
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