Emerging market equities increasingly attractive to institutional investors
Europe seeking to resolve its debt crisis and developed markets further afield offering limited growth potential, the opportunities emanating from emerging regions and their equity markets in particular, appear to be a tempting proposition for institutional asset owner groups. As pension schemes come under increasing pressure to reduce funding deficits, the appetite for emerging markets (EMs) is reaching a period high; so Clear Path Analysis assesses this trend and analyses the various geographic investment opportunities.
Archie Hart, portfolio manager at Investec Asset Management, outlines the main differences between emerging and frontier markets: “EMs typically have stronger political and corporate governance over time, and this reduces your risk. Additionally liquidity is much higher than before. EMs are generally democracies and relatively stable ones. The obvious exception to this is China but, although it is not a democracy, it has been relatively stable with the same government in power for roughly 50 years.”
Hart warns against an overly simplistic top-down focus on country GDP growth when investing in EMs: “Economic growth can be a driver of EM equity returns, however we would also maintain that the issue is significantly more complex than that. EM equity returns are a product of a number of different drivers. In a complex and ever-changing world, what is necessary for investment success is a bottom-up focus on stock selection (given stock returns vary so widely within individual sectors and countries).”
Nevertheless, he observes that: “We are steering towards Asian markets such as Thailand, the Philippines, Indonesia and Malaysia because these economies have grown at roughly 5% per annum over the last ten years. They also have current account surpluses, good formal exchanges and low public debt. In terms of sectors, we are looking at the Chinese auto market, Asian casinos, healthcare and pharmaceutical as well as data and smartphones. For example, Samsung and Apple combined have 90% of the profit pool in the smartphone market.”
Leanne Parsons, Chief Operating Officer at Johannesburg Stock Exchange (JSE) – Africa’s largest exchange with a market capitalisation of just under $890 billion, explains what’s happening on the continent: “There is an increasing appetite for investment in EMs and African markets are no exception. Investment flows and the number of funds focused on Africa continue to rise as investors search for returns in previously unexplored markets. The total value traded in the JSE Equity Market was 18.5% between 2000 and 2011. It was 26% before the global financial crisis.”
However, that is not to say that investment in Africa is not without its challenges: “A one-size fits all approach will not work to unlock African opportunities. We believe that flexibility as well as insights from both investors and issuers will provide workable solutions to the complex issue of investment on the continent.”
Dominic Scriven, CEO at Dragon Capital, explains why Vietnam is an attractive area: “The equity market in Vietnam is growing dramatically. Investing in the VNI (Vietnam Index) either directly or through a country fund is a clear and obvious choice for those investors looking for immediate exposure to the markets. Today’s VNI market capitalisation is $30bn with 700 listed companies up from $75 million in 2000 with just five firms. Vietnam is now included in several indices and is often quoted along with other dynamic frontier markets.”
He adds: “The region offers a compelling mix of consumer-industrial and resource plays, given its geographic diversification and low entry points. Vietnam in particular is undergoing a very active new phase of reform to stabilise the economy and prevent the overheating woes of the past. This points to a significant turnaround in its economic fortunes that is expected to re-engage the country’s still-powerful growth drivers: ideal demographics, a large low cost but increasingly skilled labour force, a strong work ethic, political stability and ongoing foreign direct investment.”
Meanwhile Sean Fitzgibbon, senior managing director at The Boston Company comments: “People are looking to see improved stability and growth within EMs but unfortunately investors are going to be somewhat disappointed. Now there are going to be shorter economic cycles and more dispersion of the economic trends in the various countries. This is in part because of the actions of the developed world with things such as quantitative easing, creating inflation and disrupting the normal economic cycle of EMs.”
Echoing Archie Hart, he also lists Thailand and the Philippines as two of the countries with the best opportunities and economic trends. Fitzgibbon adds Colombia and Peru to that list. “Long term, India has the best opportunity, but they cannot seem to get their act together. It is important to look at frontier markets because this will be the next area of growth. The Middle East will probably be our first foray and, although they are not yet incorporated into our strategy, we have begun researching companies in this location. As an investor you want to make sure you are in there early.”
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