Why emerging markets have room to run

Industry insiders give their take on the stunning emerging markets rally

Why emerging markets have room to run

Money seeks out opportunity and the emerging markets remain an attractive option for advisors.

Global growth, appreciating local currencies and high bond yields have seen investors pump billions of dollars into international equities.

The emerging markets rally has kept up its frantic pace in 2018 and returns are among the best on offer. There are warnings: The Financial Times flagged up growing public debt in some of these countries, the potential effect of President Donald Trump’s protectionism policies on free trade and unpredictable forthcoming elections in Latin America.

Celebrating our industry successes in the wealth management industry

However, opinion among Canadian advisors is upbeat. A recent sentiment survey by Horizons ETFs reported that 72% of advisors were bullish on emerging markets and Mark Noble, the company’s senior vice president, head of sales strategy, says this represents a major switch in strategy.

He said: “This fits with a big mind change in the Canadian advisory community last year where, especially in the ETF business, well over $6 billion went into international equities ETFs. So they outsold Canadian equity 2 to 1, and they outsold US and Canadian equity combined.

“This is the first time this has happened in the ETF industry, and it’s suggesting a big change in the mindset of Canadian advisors and investors in that they are looking beyond North America. Vanguard did a study, I think around 2014, where they found that 85% of equity held by Canadian holdings was in North America. You’ve got a huge home bias, so for Canadians to be looking outside North American is a really big change in their strategy. This bullishness on emerging markets really jumped out at me.”

Noble puts the rise of emerging markets down to economies, led by China, finding their legs in the same way the US did about three years ago. Emerging market valuations are, also, cheaper than North American equities and Noble says that all the drivers of growth are there to support it, like a growing price manufacturing index and the fact central banks are starting to pare back stimulus.

He said: “When you look at emerging markets, they were at decade lows in relative valuation standpoint, so I think people are really looking at China and India and these emerging economies to heat up and then provide some really big, relative returns versus North American equities because they’ve been oversold and relatively undervalued for so long.”

Grant White, an investment advisor at National Bank Financial, says he expects the good returns from emerging markets to continue but he warned against getting too excited with the balance of your portfolio.

He said: “I think people are searching for value and it’s been harder to find in North America with where we are in terms of pricing and valuation. Emerging markets have been a good place to find it. Likewise, internationally, out of North America, there’s been some good value, even in more developed markets. But I think that’s the nature of it. Money is looking for a place to go and emerging markets are showing some good value, and I think that will probably continue for some time.”

He added: “I think you always have to be cautious. You don’t put 100% of your money into this; this is more of a 10% to 15% kind of position but you still have to be cautious and know the fundamentals of what you’re doing and find good value. I certainly think it’s a growing part of the world and that’s great.”

Rob McClelland, founder of McClelland Financial Group and senior financial planner, co-branch manager of Assante Capital Management, has also been buoyed by returns and sees this as the perfect time for some rebalancing.

He said: “In the past 12 months, certainly the international markets and emerging markets have delivered double-digit returns. Almost every single country in those regions has delivered double digit returns for Canadians, so that’s good but does that mean you chase it? I don’t think so.

“You’ve already got two or three years’ worth of returns in 12 months so it’s probably time to take a little cream off the top and put it into areas that have struggled.”

Related stories:
Inside a portfolio manager’s 2018 investment strategy
Why it’s time for Canadians to ditch home biases