Mark Mobius, the fund manager who popularised investment in emerging markets, is far from throwing in the towel, even as the asset class he made his name in is heading towards its biggest annual decline since the global financial crisis of 2008.
“The long-term outlook is very good for two important reasons,” he said.
“First, at the present time many investors are underweight in emerging markets. Secondly, emerging markets continue to experience more than double the growth of developed markets.”
The main index that investors use to track emerging markets, the MSCI Emerging Markets Index, has fallen 20 per cent this year and 15 per cent in the past month as the bubble in China’s stock market, the biggest weighting in the index, popped.
The woes of emerging markets have, however, been compounding in the past couple of years.
This is largely because of slowing demand for commodities, which many emerging markets, including the UAE, rely on to fund a large part of government budgets.
At the same time, currencies of developing countries have been declining against the US dollar as the world’s largest economy emerges from the financial crisis, reducing foreign purchasing power for American products such as the iPhone, Nike shoes and Kellogg’s breakfast cereal.
Mr Mobius, who oversees US$37 billion as the executive chairman of the Templeton Emerging Markets Group, said although the sell-off of Chinese equities might be justified because of uncertainties surrounding slowing growth in China, it was not “logical” given the political and economic stability in countries such as Russia and Brazil, and questions over when the United States would raise interest rates.
He said investors were tarring all emerging markets equities with the same brush, forgetting their economic fundamentals.
“When there is a retreat from the market in the short term, there is a general retreat without regard to the sector or country,” said the emerging markets veteran of more than 40 years.
“But once that initial emotional reaction is over, then investors start to differentiate and select those sectors that have good prospects. Even in countries with heavy dependence on commodities, such as Brazil and Russia, a closer look will reveal some good investment opportunities.”
Emerging markets stocks were given a boost after the global financial crisis in 2008 when the US Federal Reserve and other central banks started to inject monetary stimulus and keeping interest rates low to shore up economic growth.
But when the Fed signalled in 2013 that it would start to limit its supply of cheap money, it sparked a sell-off of emerging markets assets. That was worsened by economic weakness and political instability in countries such as Turkey and Russia.
Weakening global demand for commodities has also taken a toll on many countries reliant on their exports of energy and food commodities, hurting their listed companies.
Sales of crude oil, a key revenue source for Arabian Gulf countries, have been declining partly because of weakening demand from China amid slowing global demand for Chinese export goods.
Oil prices have fallen more than 50 per cent in the past 12 months as production in countries including the United States has risen while demand declines.
Still, discriminating investors who pick and choose stocks and sectors would be rewarded, said Mr Mobius.
“In some areas such as the oil industry and mining, some companies are experiencing slower earnings growth, but there are a number of companies, particularly in the internet and consumer areas, that are having good earnings growth,” he said.
mkassem@thenational.ae
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