Emerging markets managers have had a rough trot in the past year or so, but the asset class is very different to what it used to be. For instance, a likely recovery in Brazil may well prove that emerging markets have not entered “contagion” territory. And they may never again.
According to Sean Taylor, a managing director and the CIO for Asia Pacific and global head of emerging markets of DWS (formerly Deutsche Asset Management), if Brazil gets a reformist government it has the potential for its investment returns to get better on a long-term structural basis.
Since its political troubles which started in 2004, Brazil has plummeted from about 16 per cent of the emerging markets index to just 6 per cent. DWS thinks it’s a buying opportunity.
Taylor has been managing money in emerging markets for 24 years. He oversees both equities and emerging markets debt strategies for DWS. He is currently keen on India as well as Brazil.
The two things this year which have made investors a little skittish about emerging markets are the continued strength of the US dollar and a couple of isolated incidents which prompted them to lose confidence in countries such as Turkey and Argentina. Their Achilles heel may well be the oil price, he believes.
“Since the [northern hemisphere] summer of this year the debate has been about whether the emerging markets were going into contagion,” he said on a recent visit to Australia from his Hong Kong office. “We don’t think it is.”
Taylor said that Russia was different from Turkey, which was different from Mexico and South Africa. Investors should not underestimate the importance of emerging markets, especially given their low correlation with other asset classes. And each country is different.
For instance, Russia was “very cheap”, he said, and with high growth prospects. The dark cloud was the possible impact of sanctions against it. Emerging markets remain inexorably linked to geopolitical issues. South Africa’s new president has been talking about land repatriation which has meant that international investment has slowed down.
Taylor said that “everyone understands the China story” but India was a market with a lot of growth potential over the next few years. “If Modi [the prime minister] continues to lead and remain popular for the next few years there will be very good prospects for investors.”
He says that, while country-level decisions are important, “nothing substitutes for good stock analysis”. South Korea, in particular, is renowned for the impact of stock-specific decisions rather than currency or country. Usually, though, it’s the currency moves which cause most volatility, especially this year.
DWS was positive on emerging markets last year, which was a successful view to have, but took its positions to neutral after the rally. The five main themes at the moment are:
- A headwind from the continued strength of the US dollar
- A headwind of US interest rates moving, with three more rises between now and September next year
- Sorting out the “trade issues”
- The Chinese government probably stimulating its economy gradually, and
- The potential for Brazil to show the rest of the emerging markets that there is no ‘contagion’.