Emerging market equities tipped as new darlings of investment
Fears over poor corporate earnings are diminishing, and monetary policies improving, putting less pressure on emerging currencies, says asset manager Robeco
International asset manager Robeco has turned tactically bullish on emerging market (EM) equities, suggesting that China’s economy is on a firm footing longer term.
The company’s portfolio managers including Dimitri Chatzoudis and Wim-Hein Pals, now predict emerging equities to outperform developed equities, both in the short and long term, even though sentiment has been largely negative on EM stocks for the past six years.
Driving that negativity have been fears of a Chinese economic hard landing, Brazilian political and corporate corruption scandals, Russian geopolitical issues and an African collapse at the end of the commodity boom era, said their report.
All those events have led to disappointing performances in the asset class, with many investors withdrawing from stocks over the last couple of years.
China’s benchmark Shanghai Composite Index continued to fluctuate between 2,000 and 2,400 points from 2012 to 2014, but this year it has maintained its level at around 3,000, after last year’s market turbulence.
In the report, Robeco says emerging equity markets have continue to be resilient, both in absolute terms and compared with developed equity markets even after the recent UK referendum.
“The Brexit vote is obviously predominantly a European issue and from a fundamental point of view the longer term effect on emerging markets is limited,” said Pals.
“Among all the global trading blocs it is Europe that will face the most uncertainty in terms of future political and macroeconomic developments,” he said.
Also important, since most emerging currencies are far more correlated to the US dollar than the euro, emerging currencies should remain relatively immune to potential turmoil in Europe, Pals added in the report.
It blames the underperformance of the emerging equities asset class from late 2010 to late 2015 on weak corporate earnings compared with their developed peers.
“But we expect better earnings ahead, on the back of more favourable monetary policies and less pressure on emerging currencies,” says the report.
“The reforms in China, India, Korea and Indonesia are also positive, both from a macroeconomic perspective and for financial markets.”
Robeco said with investors tending to focus on short-term macroeconomic indicators, which in China’s case has meant its debt issues, and challenges with regards to opening up the country’s financial markets to the world, resulting in yuan volatility.
Other often heard concerns about emerging equities, it says, is the rise in US short-term interest rates, and political turmoil and corruption issues.
“From a long-term perspective, though, the Chinese are world champions when it comes to long-term strategic plans. China is in transition: from the world’s production hub supported by low wages, to a knowledge-based service economy.”
To achieve this goal, Robeco thinks China now is successfully moving towards foreign capital, entrepreneurship and private investment, which the Chinese realise could take decades.
Longer term, Pals remains concerned over the country’s debt levels, but it concedes, so does the Chinese government.
“For the time being, we foresee an increase in debt-to-GDP ratios,” he added, “but for now the levels are below those of many other countries, both developed and emerging.”