Brains or blind faith behind EM call?

Added 25th August 2016

Emerging markets are back in favour, but are investors going back in on solid fundamentals or blind hope? asks Gary Shephard, editor of FSA's sister publication Portfolio Adviser.

Brains or blind faith behind EM call?

BlackRock is the latest of the huge money managers to upgrade its view on the asset class, and there’s expectation that growth will soon follow. It says emerging equities are at trading at a 24% discount to global developed markets on forward earnings multiples.

This is a fair observation, but with investors’ obsession for uncovering undervalued opportunities could it be that they are just buying solely on price?  

Fresh from a successful Rio Olympics, it makes sense to talk about a resurgent Brazil. However, as Manulife’s Kathryn Langridge stressed to me recently, a big question is to what extent the long-term value creation potential is now fully priced in.

“It is not so much that commodity prices have recovered, but because of changes in political risk, and with that there has been a reassessment of the extent to which the Brazilian administration can manage the massive adjustment that is taking place in the economy,” she notes.

Energy continues to dominate the narrative on certain markets, including Brazil and Russia, but it’s easy to forget that the likes of Petrobras, Vale and Gazprom all suffered during the commodities downturn and are not quite as dominant as they once were.

"If something really is ‘emerging’ then by its very nature it is not standing still"

Headwinds have arguably turned to tailwinds – the Fed’s decision to hold back on rate rises has helped while, in Asia, the Chinese authorities have largely stabilised the economy (for now at least) and India is also benefiting from pro-reform policy agenda.

Still, the uncertainties remain about the traditional fund route to emerging growth.

While passives continue to take market share and names such as Somerset, Fidelity and Hermes have made ground on the old guard of First State Stewart and Aberdeen, others recommend an entirely different approach altogether.

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