Better times ahead for emerging markets but a return to 2000s performance is ‘inconceivable’
Having underperformed for the last five years, Neptune has recently began building its exposure to emerging markets, adopting an overweight position in the region within its Global and Balanced funds in the last few months.
However, while Dowey says valuations are currently supportive within the region, he adds in his view it is “inconceivable” they will return to their run of outperformance in the 2000s, a decade in which an equal weighted index of the BRIC (Brazil, Russia, India and China) markets grew 370%.
He says: “We had an extraordinary period in the decade of the 2000s where emerging markets blew the lights out and at the same time the west was stumbling headlong into the tech bubble and the sub prime crisis.
“However five years later these same economies were heavily underperforming developed markets, as the economies and the political frameworks around them fell into disarray. So when you are looking from the prospects from here, there are a wide range of possibilities.”
The problem for Dowey is that the case for emerging markets was built up on a number of exaggerated economic and political claims. For example, the hope and belief that emerging market countries were on an inevitable trajectory towards liberalised democracy, which would have been very supportive for market capitalism.
“However there was nothing automatic about this political trajectory and over the past five years all of the BRIC countries have been embroiled in corruption issues and have struggled to implement structural change politically,” he says. “So in my view it is inconceivable that we return to the types of outperformance seen during the 2000s and investors need to be strongly cognisant of this.”
In Dowey’s view, despite their perception as growth stocks, emerging market companies work best for investors as value plays.
“You have to look at them in terms of the value of the equity markets and the valuation of the currencies,” he says. “These two lessons provide a framework for where we stand today.
“Right now, while not fantastically valued, equity valuations are good enough. Currencies meanwhile are much better valued. As such on an incremental basis – with the threat of a Chinese recession diminishing and Federal Reserve taking Chinese stability into account within its monetary policy – we have warmed to emerging markets this year.”