Life goes in cycles, they say, and that is certainly true of investing. Just take emerging markets as an example.
They swung into fashion in the 1990s, until the 1997 Asian financial crisis and 1998 Russian crisis slammed on the brakes.
They rolled back into fashion in the early years of the millennium, as emerging Bric economic superpowers Brazil, Russia, India and, above all, China swept all before them, then came another painful crash.
The MSCI Emerging Markets Index has back-pedalled in four out of the past five years, and suffered a thumping 14.92 per cent reversal last year.
Now the cycle seems to be swinging back in their favour, as a host of fund managers and analysts hail the sector’s recent return to form. The time to buy emerging markets is at the bottom of the investment cycle rather than the top, so should you dive in today?
Richard Turnill, the global chief investment strategist at global fund manager BlackRock, reckons that emerging markets are in a “sweet spot”, helped by the weaker dollar, signs of recovery in China and the recent dramatic pickup in commodity stocks (after last year’s even more dramatic falls).
The MSCI index is up 13.66 per cent in the past three months and investors are taking note, with BlackRock calculating that nearly US$16 billion has rushed into exchange-traded funds (ETFs) in the sector. The crowd of short investors who were betting on further emerging market misery is now drifting towards the exits.
Mr Turnill isn’t getting carried away though; following the recent rally, emerging market valuations are “no longer unambiguously cheap”.
There could be further trouble ahead, especially if the United States Federal Reserve hikes interest rates again. “Fed tightening, a Chinese yuan devaluation or economic slowdown, and a renewed slump in oil prices are all risks to the emerging markets story,” says Mr Turnill.
He expects the rebound to continue for now and he isn’t the only optimist out there. Fund managers Robin Geffen and James Dowey at Neptune are claiming that 2016 will be remembered as the year you should have been buying emerging markets.
Mr Geffen, who runs several funds including Neptune Global equity, has upped his exposure to China and Russia for the first time in years. “People had completely written off emerging markets, but that’s where I think things became interesting. The wholesale selling is now over. None of these markets, apart from Brazil, are as bad as people believe.”
Noting that emerging markets have been through several false dawns, notably this time last year, Mr Geffen adds: “You don’t want to put it all in now, but you want to be building positions that are looking carefully at valuations”.
Probably the best known emerging markets investor of all, Mark Mobius at Templeton, has also found renewed appetite for the sector, saying that despite short-term swings the long-term investment case remains strong.
He points out that economic growth rates are faster than in developed markets, while foreign reserves are greater and debt-to-GDP lower. “Even with major economies like Russia and Brazil in recession, emerging markets overall are expected to grow 4.3 per cent this year, more than twice the rate of the 2.1 per cent growth projected for developed markets.”
Investors may be concerned about China’s slowing growth, but it is still one of the fastest-growing economies in the world.
Mr Mobius reminds investors of key facts they may have forgotten during the downswing: “Market countries account for nearly three-fourths of the world’s land mass and four-fifths of its population, present considerable potential in terms of resources and demographics, and look to be in a strong position to benefit from technological advances.”
He says that too many investors are “underweight” in emerging markets following recent falls, and this could prove costly as they look undervalued compared to developed western markets. So is it time you bulked up on emerging market funds?
Rather than simply pile into the latest hot investment theme, it is always wise to look at what exposure you may already have.
Ashley Owen, the head of investment strategies at independent financial advisers AES International in Dubai, says most investors should have a well-diversified portfolio covering all geographical regions, including emerging markets.
“We believe our clients should have a weighting of no larger than 6 per cent for a balanced portfolio and 11 per cent for an aggressive portfolio. This would be a long-term holding rather than a short-term tactical position.”
Mr Owen suggests that the UAE expats invest in a well-diversified index tracker such as iShares MSCI Core Emerging Markets. “This is a great low-cost way to gain exposure to the region, with a total expense ratio of just 0.25 per cent.”
This fund invests across a globally-weighted spread of emerging markets, including China, Korea, Taiwan, India, Mexico, Russia and a spread of South East Asian countries such as Malaysia, Indonesia, Thailand and the Philippines.
Mr Owen adds that emerging markets remain slightly undervalued, which could make now a good time to invest, although it depends on the country, with India relatively expensive but Russia relatively cheap.
He says you should not invest expecting to make a quick profit. “You should be looking for cautious, long-term capital over many years.”
The investment expert also warns investors to brace themselves for further turns of the emerging market wheel of fortune. The biggest danger is that the Fed hikes interest rates faster than investors currently expect, and emerging market governments could struggle to service their US dollar debts if the greenback strengthens as a result.
Tom Anderson, a regulated investment adviser at Killik & Co in Dubai, agrees that most investors should put only about 10 per cent of their portfolio in the region. “Emerging markets tend to be more volatile than traditional equities, although investors have always expected them to outperform.”
He recommends using ETFs to gain exposure to the region as they have the lowest charges, which will accelerate your returns. “ETFs allow you to track the fortunes of a broad range of markets, whether regionally such as Asia Pacific and emerging Europe or individual countries such as Brazil, China or even the Philippines or Malaysia.”
Mr Anderson says this may be too complex for most investors who might want to hire a professional fund manager to make decisions on their behalf.
Alternatively, you could invest in a spread of generalist funds, he says. “We would use Lazard Emerging Market fund for broad exposure, specialist fund manager First State for China and Asia Pacific, and then the New India trust and Findlay Park for Latin America.”
The investment adviser warns against buying these funds within an offshore bond, which are heavily promoted to expats but are expensive and inefficient, with high charges reducing your overall returns. “By minimising your fund and advice charges you receive as much of the gain as possible,” he says.
Emerging market investors have brushed themselves off and got back in the saddle in recent months, but you should hold on tight, as they will continue to offer a bumpy ride. You need to be ready for the downswings as well as the upswings, so only invest money you do not expect to need for at least five or 10 years, preferably longer.
pf@thenational.ae
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