The appetite for emerging market equities
among institutional investors is reaching a period high, according to a report
by Clear Path Analysis.
Investors
are said to be looking further afield from the uncertainty gripping the
eurozone and other developed markets that offer limited growth potential.
Institutional
asset owner groups are being tempted by the equity markets in emerging markets
such as South Africa, Indonesia, Malaysia, South East Asia and South America.
Complementing
this increase in investor interest, emerging market central banks and
governments are said to be progressively responding to calls for responsible
fiscal and monetary responsibility.
Archie
Hart, portfolio manager at Investec Asset Management, outlines the main
differences between emerging and frontier markets thus: "Emerging markets
typically have stronger political and corporate governance over time, and this
reduces your risk. Additionally liquidity is much higher than before.
Emerging
markets 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."
However,
Hart warns against an overly simplistic top-down focus on country GDP growth
when investing in emerging markets: "Economic growth can be a driver of
emerging market equity returns; however we would also maintain that the issue
is significantly more complex than that. Emerging market 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."
Nonetheless,
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."
Dominic
Scriven, CEO at Dragon Capital, is also looking towards Asia as a key point of
interest for investment: "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 warns against
investors expecting too much from emerging markets: "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, along with Colombia
and Peru, as two of the countries with the best opportunities and economic
trends: "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."
However
a recent report from Schroders Asset Management, highlights frontier markets as
providing investors access to some of the most dynamic and fastest-growing
economies in the world supported by strong secular growth drivers.
Schroders
says that the frontier markets offer investment opportunities that are getting
less risky as market liberalisation accelerates and valuations look attractive
in absolute terms versus the developed and emerging worlds.
Tahmina
Mannan
Business & Investment Opportunities
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