Learn from experience in emerging markets

Should private clients be investing in emerging markets? This is a question which continues to tax the minds of chief investment officers and relationship managers.

Recent flows have massively favoured developed market equities, with European stocks the sweet spot. US institutions, the most-watched players in the market, pumped $65bn (€48bn) into Europe’s share markets during the first half of 2013, the highest level since the 1970s.

Emerging markets on the other hand, performed poorly, although with some improvements even ahead of the Fed’s surprise boost.

Stockmarkets of developing nations, including Brazil, India, Indonesia and Turkey, were “torched” due to the raising of interest rates to “economically unjustified levels” in order to stem currency outflows, according to Tim Gregory, head of global equities at Psigma Investment Management. These funds fled due to expectations of an imminent change in Fed policy.

But immediately after the mid-September announcement that quantitative easing would remain unchanged, with the US Federal Reserve continuing its $85bn monthly asset purchases, US stocks soared.

Hong Kong’s Hang Seng and India’s Nifty also surged. Tensions surrounding the Indian rupee – which had fallen 20 per cent at one stage this year, leading to investors withdrawing $8.9bn from Indian bonds and $3.7bn from equities – also appeared to evaporate as the currency shot back to previous levels after the announcement.

Even on slightly longer-term data, the performance of the developing economies has been improving. Despite the underperformance of emerging markets versus global equities in 2013, the gap has been narrowing.

During the first half of September, emerging markets outperformed developed countries, according to index provider Russell, with leading performers in the third quarter including Greece (with an 18.8 per cent gain), Poland, China and Russia.

Gustavo Galindo, emerging markets portfolio manager at Russell Investments, says: “A better China picture, improving fundamentals and attractive valuations relative to developed global markets help underscore the continued important role emerging markets can play as part of a broadly diversified global multi-asset portfolio.”

Some investors may need convincing about these dynamics.  Fund house Henderson says emerging markets “still face some fundamental economic challenges”.

But for the grizzled specialists who kick the tyres of the developing world, there is little doubt these countries continue to play a value-adding role in balanced portfolios.

During the early to mid 1990s, when Hong Kong island was littered with primitive looking building sites peopled by migrant workers precariously scaling bamboo scaffolding during long construction shifts, economists remained sceptical about investing long-term in Asia.

But emerging markets guru Mark Mobius, who criss-crosses the world for company visits and marketing pushes for Templeton’s latest fund launches, managed to persuade European institutions to follow his lead and invest in Hong Kong and the nearby Chinese Special Economic Zone of Shenzen. The latter’s status has risen from provincial Chinese town to a city of nearly 10.5m.

From 1992 to 1996 – the years when he was particularly promoting the investments in the territory – the Hang Seng index of leading shares achieved an average annual return of 26.5 per cent, not including dividends.

For his troubles, Mr Mobius, with his trademark bald head, shining eyes and bespoke tropical suits, became a talisman for the highly superstitious Cantonese people, who awaited his TV appearances, stock tips and fund recommendations. Both journalists and investors hung onto his every word when he breezed into a conference, press centre or bank branch.

These days, he is telling clients to put money into Malaysia, where a plethora of Islamic funds encourage good governance by banning unethical activities; and Africa, where ex-Boomtown Rats singer and poverty campaigner Bob Geldof has been banging the drum for increased investments.

As the once unassailable king of emerging markets, Mr Mobius may draw smaller crowds than he did in his heyday, and is the subject of increasing criticism. Some claim he is more of a salesman than an investor, others that his mega funds simply bid up share prices in developing countries, disregarding economic fundamentals.

Emerging markets managers are also regularly accused of being in bed with dictators, as businesses are often inextricably linked to wealthy families connected to the ruling class.

But Mr Mobius asks: how many real democracies are there in the world? He learned at the Massachusetts Institute of Technology during the 1970s that investing in the infrastructure of poor countries would boost business and improve quality of life. As an investor, he has also stood up to some powerful business and political clans.

Most private bankers and institutional investors are aware of his record. Templeton funds are among the first to be picked for guided architecture platforms by private banks across Europe and Asia. Relationship managers know there is always a story they can tell clients about these funds.

Those who write off emerging markets, and their vocal promoters such as Mr Mobius, must remember he has an uncanny knack of being in the right place at the right time.  

See Big Interview with Mark Mobius and read why wealth managers remain upbeat over India