Ben Yearsley is the Head of Investment Research at Charles Stanley Direct
Investing is a long term proposition. If you want to beat cash and achieve higher returns, then historically equities are the game and long term is the name! I mention this as in a recent meeting with James Donald, manager of the Lazard Emerging Market fund, this was one point he returned to time and again, emerging market investing is a very long term commitment.
That comment is apt as, surprisingly, over the last five years emerging markets have underperformed developed markets such as the US or UK. It is hard to put a finger on why as economic growth rates in many developing countries are much better than say in the UK or US and there are far fewer demographic problems. The simple reason could be down to the risk appetite of investors.
Emerging markets as an investable universe have changed markedly over the last 25 years, with dramatic changes over the last 15 years especially. The improvement in fiscal conditions has been paramount, for example many emerging nations used to be heavily laden with debt, now they have lower burdens than many developed countries. 85% of the world’s population lives in emerging nations and 63% of global foreign exchange reserves are held by these same countries. This increase in wealth is enabling hundreds of millions of people to become consumers for the first time.
2013 has been an interesting year and one in which Mr Donald didn’t expect emerging markets to underperform; he puts this down to two factors; firstly worries about Chinese growth rates and secondly (and more recently) worries about the effects of US tapering of quantitative easing and money flooding out of emerging markets. In addition both the US and Euro regions have actually performed better than expected!
However, Mr Donald is still optimistic about emerging markets and doesn’t currently think valuations are expensive. He also thinks the underlying fundamentals, such as sales numbers, are also fine. The recent short term pessimism has enabled him to buy into companies and areas he has previously avoided, for example the Chinese weighting within the fund has risen from 3% to almost 12% as valuations have fallen so far he can finally buy into good companies at cheap prices.
The rate at which US interest rates increase will be crucial in the coming few months and years as this will lead to a period of US dollar strengthening. Unlike in 1994 though (the last period of sustained interest rate increases), the pressure on equity valuations will be lower as quite simply Mr Donald says they are much cheaper today than they were then.
There are clearly higher risks with emerging market investing, however, in my opinion, many of these are priced in to today’s valuations. For longer term, higher risk investors, now may be an apt time to consider an investment for the long term as part of a wider portfolio of investments.
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