When Christine Tan
speaks to investors about emerging markets, she is often asked the same question: is it too late to get into, and benefit from, the emerging market rally? Her answer is a simple ‘no’.
Yes, emerging markets have been on something of a tear and outperformed developed markets
since the middle of last year, but to measure the true extent of EM’s potential investors have to look a little further back, explains Tan, who is chief investment officer at Excel Funds.
When then Federal Reserve Chairman Ben Bernanke first started talking about tapering in May 2013, it was thought the strategy would strengthen the U.S. dollar and increase global interest rates, both of which would be detrimental for emerging markets. Following taper tantrum, between May 2013 and the middle of 2016, the broad emerging markets benchmark index was only up by around 12 – 13%. Meanwhile, the developed world index was up about 50% in the same period and the S&P500 was up around 70%.
“Although EM has outperformed since the middle of last year, it is still behind,” Tan says. “Since the start of the taper tantrum up until today the emerging market index overall is only up about 56%, the world is up 91% and the S&P500 is up 115%. I always try to remind investors: it’s easy to focus on what’s been happening most recently, but it’s really important to take a look at that in context of the past.”
So, what’s behind EM’s current outperformance?
A major element is that, simply put, a lot of the perceived negative impacts of taper tantrum didn’t really happen. There was a lot of speculation around how badly the so called ‘fragile five’ group of countries - Brazil, India, Indonesia, South Africa and Turkey – would be affected, but nothing overly detrimental occurred.
“Those countries proved themselves to be quite resilient, and in India’s case the government has put through a lot of transformational reforms
that have set the country up for even faster growth going forward,” Tan says. “We are starting to see that reflected in valuations. After a few quarters of noisy earnings in the emerging markets, we are starting to see earnings reversion to the upside and that’s why stocks are starting to respond.”
Despite the outperformance, valuations are still trading at a discount to developed and U.S. equities
and certainly still offer superior earnings growth potential. However, you do have to be selective, Tan says. Most of the leadership is coming from growth and secular growth sectors like technology, which is leading the way.
“If you look at Alibaba and Tencent’s recent earnings, they are nothing short of spectacular,” Tan says. “To some extent, those companies are benefitting from the same interest that the FANG stocks are; in the current markets, investors want to find visible growth companies with less economic vulnerability.”
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