The extent of emerging market underperformance relative to developed market indices is illustrated in the above chart, and is something Tim Lowe, director of emerging market equities at GAM Investments, attributes to investor concern about the outlook for China’s economy and market.
He says: “Emerging markets have been dragged down by China, where loss of wealth has been overwhelmingly large. If you exclude China, emerging markets are doing better than industrialised economies excluding the US. For instance, the MSCI EM Latin America 10/40 Index exhibited impressive growth of 34 per cent last year.
"People generally opt for the easiest money. Currently that is in US government bonds, with 5 per cent yields. However, emerging markets have a more attractive risk/reward profile because they tend to capture greater upside when global growth improves.”
That the broader emerging market is linked to the fate of China is demonstrated by that country’s equity market being around 25 per cent of the index, though it was as high as 40 per cent prior to China’s sell-off, but also because Chinese consumers tend to be substantial spenders in other emerging economies.
Underneath the bonnet
Whiting says that while some of the economic data emerging from China does point to improved conditions, consumer confidence remains relatively weak because of issues within the property market.
She adds that at the market level, investors may have been expecting a “big bazooka of fiscal policy response to stimulate growth, instead what we got is a series of smaller measures”.
In contrast to the pessimism around China, Whiting says investors are now particularly keen on India.
She says the price to book valuation metric at which the Chinese market trades is presently around 1.1, whereas the Indian market is 4.4.
Her view is that the fundamentals of the Indian economy are strong, the “companies can grow into the current valuations, but are suitable for clients with the time horizon that means they can wait”.
Gaurav Narain, who runs the India Capital Growth investment trust, says the part of that equity market that may have had the greatest degree of “froth” is in the small and mid-cap area, but that valuations there have been impacted recently by regulatory action.
He notes this may have removed some of the froth from that part of the market as investors ponder the impact of the forthcoming elections on the regulatory regime in that country.
Seema Shah, chief global strategist at Principal Asset Management, says: “Emerging markets present a mixed bag. India remains on the pricier end, and China’s market is likely to continue struggling unless policymakers introduce new and impactful stimulus measures.
