Global emerging markets have had a stunning run since late March.
The MSCI Emerging Markets Index is up by 46.3% in sterling terms in the six months to 30 September.
Correlations between emerging markets and global risk-taking have proved as high as ever, suggesting decoupling of emerging markets remains unlikely. Having said this, China’s strong economic performance and the robustness of many developing world consumers to the credit crunch have demonstrated the long-term investment case is intact.
Given recent rises, we have a number of concerns about the short-term outlook for emerging markets. Having rallied very strongly, markets are no longer attractively valued. Our favoured stocks in Brazil, China and India are expensive and we believe there is limited value in the global emerging market universe. We do, however, continue to find some attractively-priced quality franchises in the less popular markets of Israel and South Africa.
One of our major concerns is about debt monetisation in the developed world. Such a large expansion of the money supply may have underpinned a significant increase in risk appetite, but also has the potential to give rise to inflation, especially in fast-growing emerging economies.
Against this backdrop, we continue to view gold as a store of value. Medium-term growth in the developed world is likely to be subdued until more of the debt mountain is repaid, as fiscal spending cannot prop up economies over the long term.
Stockpiling of resources by China suggests dissatisfaction with US monetary policy and hints at significant headwinds for commodity prices in the medium term. We anticipate stock markets in Brazil, Mexico and Russia are vulnerable to a correction in resource prices.
Following the debt binge of the last decade in developed economies, emerging consumers are in much better shape financially than their developed-world counterparts. As a result, we have investments in a substantial number of brand-owning companies exposed to the consumer.
We remain positive on the long-term outlook for the asset class as we expect economic growth to be higher than that of Western economies. This will provide companies with excellent opportunities to boost sales and profits. Across the developing world, there are an increasing number of quality companies with proven management and strong business franchises that are focused on long-term shareholder value.
Jonathan Asante is senior portfolio manager, First State Global Emerging Markets Equities
