Investors who put money into emerging markets at the start of 2013 have had a miserable time. While shares in developed country markets forged ahead on continuing evidence of economic upturn, emerging markets went into reverse, on what is now a wearisomely familiar set of excuses: disappointment over macro-economic data, volatility (any remotely concerning turn of events world-wide is the trigger for sell-off) and capital repatriation to Western financial markets on expectations that interest rates are likely to rise sooner than expected.
Out of 150 investment trusts in the global trust sector, JP Morgan Emerging Markets managed only 119th place with a 10.4 per cent fall in its share price. The bellwether – Templeton Emerging Markets – came in at 121st with a fall of 11.2 per cent.
Nor is there a fat dividend yield to cushion the falls in emerging market trusts – JP Morgan Emerging Markets yields just 1.02 per cent, Templeton 1.15 per cent.
The case for emerging markets, of course, rests on their long-term potential to pull ahead of Western markets. But the evidence of outperformance over time is hardly overwhelming. Templeton Emerging Markets comes in just 71st in that table of 150 “global trusts” over a five-year period with a gain of 73.9 per cent – respectable but handsomely outperformed by most trusts with a developed country focus.
Investors would have done better with a mainstream global trust such as Law Debenture Corporation, 14th in the table with a gain of 181 per cent over five years, or Scottish Mortgage at number 15 with a gain of 179 per cent. JP Morgan Emerging Markets is at 79th place with a gain of 73.9 per cent. Considering the higher risks involved in emerging market investment, that is not an impressive return. Little wonder many retail investors pulled out last year.
Now there is a recovery, of sorts. Emerging markets and the Asia Pacific region have both outperformed the major developed world indices this year after the effects of the recent sell-off, according to FE Analytics data. As markets struggled to make further headway this year, the emerging markets and Asia Pacific are showing gains.
The FTSE All Share is down 1.3 per cent for the year and the S&P 500 1.58 per cent, while the MSCI Europe index is flat. However, the MSCI Emerging Markets index is up 0.36 per cent while the MSCI AC Asia Pacific index has made 2.25 per cent.
Managers and analysts have argued for some time that low valuations in the emerging markets would lead to a rebound.
So what has ailed emerging markets? Their economies are enjoying strong growth but that growth is often uneven, volatile and vulnerable to pull-backs of Western capital. In many cases stock markets have amply priced in the potential. And in several countries, China notably, corporate information is opaque while governance standards lag well behind the West.
Yet the compelling case remains. Last week, I chaired a lecture at the University of Edinburgh Business School on The Asian Century: Mega Trends and Global Champions given by Dominic Barton, global managing director of McKinsey. The main theme of Barton’s lecture was hardly new – the rise of Asia has been the chief preoccupation of academics, economists and politicians for the past 30 years. Despite this, Barton still believes China’s importance, promise and threat remain vastly under-appreciated by Western business.
American households, which drove recent economic growth, are awash in debt and scaling back as the population ages. Meanwhile, within the next five years, China and India will comprise 900 million consumers – three times the US market – and China will have more affluent citizens than any country except the US, UK and Japan.
Barton’s presentation was a tour de force of evidence and detail. There are huge opportunities for Western companies to rise to the challenge of meeting the aspirations of this new consumer market and for continual expansion and innovation in products and brands.
The impression I had was that the best way into the emerging markets was through Western companies that could establish and build brands. That requires them both to be large-scale organisations with global reach but with the ability to operate and innovate as small-scale entrepreneurs – no easy task. But if it’s emerging market potential that investors wish to capture, it’s for the best and most successful at home that we need to look.