Emerging markets more attractive, says asset manager Vanguard

Asset manager's chief sees more opportunities for growth than in the developed world

PUBLISHED : Monday, 31 March, 2014, 5:27am
UPDATED : Monday, 31 March, 2014, 5:27am

Vanguard chief executive Bill McNabb says emerging markets are looking more attractive than developed markets right now despite the shadow of a potential economic slowdown, giving investors a buying opportunity.

"The best predictor for future returns is what the valuation of the market is. I think investors who have fled some of the emerging market actually aren't paying enough attention to the valuation of those markets. They actually look quite attractive versus the developed world right now," McNabb, Vanguard's global chief executive and chairman, told the South China Morning Post.

"When you look at the capital outflows from Asia, I think people are equating slower GDP [gross domestic product] growth with lower market returns, which is not a good way to invest as the two have very low correlations," McNabb said.

I would not say the US market is overvalued, but it's certainly fully valued
Bill McNabb, Vanguard

Vanguard is one of the world's biggest asset managers, overseeing US$2.75 trillion in total assets as of the end of last year. It now runs the world's largest emerging market fund, Vanguard FTSE Emerging Markets ETF, which has 22 per cent exposure to mainland China, 14 per cent to Taiwan and 12.5 per cent to Brazil.

The MSCI Emerging Markets Index lost 5 per cent last year, compared with a 24 per cent gain for the MSCI World Index of developed-country equities, as money left the region.

"The average valuation over the past 25 years in emerging markets is around 15 times earnings, compared with 11.9 today. This is a good starting point [to catch up]. I would not expect returns to be better than normal, but I would expect a slightly below average return," McNabb said.

"Even if the top-line growth is not as great as it has been historically, if they can squeeze more margins out of the slower growth, you would still have a chance for the market to go up in a reasonable way," he said.

In comparison, McNabb said average returns on US stocks over the next decade will be more like 6 to 9 per cent, compared with 9 to 11 per cent in the past few years.

"Returns [in the US] are likely over the next decade to be lower than they have been. I actually think this is probably the truth of the developed markets in general," he said.

"It is mostly because we have been in a lower inflation environment in the US and secondly if you look at the valuation today, I would not say the US market is overvalued, but it's certainly fully valued."

Speaking about China, he said he expects the mainland's GDP growth to stay at 7.5 per cent over the coming years. Vanguard is looking to become a provider of the Mandatory Provident Fund pension scheme, he said.