It’s not been a good 2018 for those investing online in Emerging Markets (EM). The MSCI Emerging Market Index, considered the benchmark for this sprawling asset class, dropped over 21% from its year-to-date high on January 26th to its lowest ebb on September 11th. Anyone following the news will also be familiar with woes of EM currencies and the particular struggles of the Turkish lira and Argentinian peso over the past few months. Chinese equity markets, a growing influence on the MSCI EM Index have also gone through a rough patch. All-in-all, the situation hasn’t been rosy.
However, as seasoned investors, or even relative beginners that have taken a little time to inform themselves, will be familiar with the old adage that the best assets to invest in are those that are battered and bruised but on closer examination still have strong supporting fundamentals. And there is a strong argument, 5 strong arguments even, that Emerging Markets right now represent exactly that kind of investment opportunity.
In a recent piece for The Telegraph, Carlos Von Hardenberg, founding partner of Mobius Capital Partners, and an investment manager with almost 2 decades of experience in emerging markets, expounds the reasons why he believes the asset class is more attractive than has ever been, despite this year’s downturn.
1) Attractive Valuations
Von Hardenberg argues that EM equities are significantly undervalued. Despite the economies that make up EM being rightly lauded as the current engine of global economic growth, a situation expected to continue for the foreseeable future, average forward p/e ratios are, at x11.4, lower now than at any significant point in recent history. In 2007 and 2009, they were higher and back in the Nineties, a period when EM economies lacked any significant middle class of consumers, companies were heavily weighted towards low-cost manufacturing and corporate governance standards were questionable to say the least, p/e ratios were at x15 and higher.
Debt levels, both private and public, are generally very healthy and despite rising interest payment costs due to current currency dynamics, most good quality EM companies are in a secure financial position.
2) Positive Inflation
Investors might start to get sweaty at the proximity of the terms ‘Emerging Markets’ and ‘Inflation’, but Von Hardenberg is convinced EM inflation is currently in a very good place. After 2 decades of decline inflation is moving up again but in a healthy way and under the control of better monetary policy. Demographics and technology developments are also now evening out demand volatility. The combination should mean that, by and large, there will be no return to the occasional bursts of rampant inflation that intermittently wrought havoc on EM economies in years gone by.
3) Technology & Innovation
EM companies which were once focused on exporting low-cost manufacturing are now turning the tables and the source of much of the world’s technology innovation. Manufacturing has also shifted towards high-value components. This is leading to increasing margins and R&D output. China is churning out tech ‘unicorns’ and billion-dollar markets such as finance and banking, barely tapped in some huge EM markets, with Indonesia offered as the prime example, offer the potential for huge tech-driven growth which is more locally and regionally dependent rather than export-oriented.
4) Divergence
International capital is also now judging different EM markets individually, rather than on broad sentiment covering the broad span of the geographically, politically and economically divergent components of one ‘asset class’. Markets that have learned from past mistakes and are maturing, such as Mexico, Singapore and Taiwan are showing divergence in the strength of their equities markets and currencies and not being dragged down by poorer performing markets in the group to the same extent as before.
5) Improving ESG
And finally, Von Hardenberg believes the new maturity of many EM economies and individual companies is combining with a hunger for international capital that is emerging as much improved environmental, social and governance (ESG) standards. A stronger approach to proactive government policy and an active voice from investors is also seeing this improvement remain on a steady course.
In combination, Mr Von Hardenberg’s 5 points for EM optimism present a convincing argument for those investing online in the asset class. So if you are already exposed to EM, there are plenty of positive signs as to why you should keep faith amidst recent turbulence and losses. And if you aren’t already, EM could be one of the best areas of exposure available to you when investing online over coming years.
