It’s a worthy lesson for investors: By the time you hear about a rising trend or stock, it’s generally too late to do anything about it. The smart money is already in, and perhaps even out again by the time you are ready to act.
The latest thing is emerging markets, again. They are benefiting from renewed investor interest, as their kryptonite – interest rate hikes and a strengthening greenback in the United States – seem to be safely locked away (though traders will look toward Federal Reserve Chair Janet Yellen’s speech in Jackson Hole, Wyo., on Friday for clues on the timing of any rate increases).
So is it too late to join the emerging-market party?
“I have been writing about this since the beginning of the year, and we were a little early, but I think it is definitely coming to the fore now,” says Tyler Mordy, president and chief investment officer of Forstrong Global Asset Management in Kelowna, B.C.
Mr. Mordy pins his bet on four factors:
- The U.S. dollar has more or less peaked against its international peers.
- A “dovish” monetary policy in the United States and lower commodity prices are keeping a lid on inflation and interest rates in emerging markets (Mr. Mordy gives the example of India, which imports all the oil it burns).
- The Asia-Western markets valuation gap is nearly as wide as in 2003 (the last time a secular bull market began).
- It’s the end of austerity, particularly in China and India, which should boost corporate earnings.
Mr. Mordy also doesn’t believe that China is heading for a U.S.-style financial crisis like that of 2008. The shift from a manufacturing and export economy to a consumer and services economy is tough sledding, but it’s under way and is unappreciated by most foreign observers, he says.
“Our firm is much, much more bullish on China than the consensus. We don’t think that there is an imminent hard-landing scenario.”
Investor aversion to China and other emerging markets shows up in bargain-bin equity prices, he says. In a mid-July note to clients, Mr. Mordy stated that emerging-market mutual fund outflows – investors selling their holdings – were at new record levels last set in 2008 and 2011. Both times they were followed by rallies.
In the retail investor world, mutual-fund outflows are also at near-record levels. Fund managers are equally pessimistic.
Mr. Mordy is not the only voice in the investment community calling for a pivot back to emerging markets. Fund giant BlackRock Inc., which is fond of emerging market debt, recently wrote about the U.S. Federal Reserve, exploring whether it would “disrupt the EM party.” It concluded a cautious Fed will not wreck the good times.
“Is it too late? No, because spreads are still wide on bonds, and stocks are still cheap on most metrics,” observes Kurt Reiman, BlackRock’s chief investment strategist for Canada.
He wrote in May about how the traditionally close correlation between emerging-market currencies and equities to those in Canada has in recent years widened. This promises better diversification for investors as those countries offer new exposure to sectors such as information technology as well as potentially higher returns from “better demography, faster growth and pent-up consumer demand.”
For Canadian investors, “we see room for EM currency appreciation versus the loonie and better portfolio diversification benefits over time than has historically been the case,” Mr. Reiman concluded in his note.
He is also high on India as an investment, with its recent tax reforms and improving current account. But broad exposure to emerging markets could also suffice for investors, he says.
His one caveat? The U.S. election in November “could pose some protectionist threats.”
The emerging markets “on sale” theme is echoed by Stephen Lingard, senior vice-president and portfolio manager with Franklin Templeton Solutions in Toronto, who manages the $9-billion Franklin Quotential Portfolios.
“The valuation argument has been there for a while. They are cheaper on the order of 25 to, by some measures, 50 per cent than developed market equities.” The biggest discount comes by measures such as the price-to-sales ratio, which strips away the distorting effect of stock buybacks by companies in the developed world.
Emerging markets are also benefitting from falling inflation, which allows central banks to cut interest rates, whereas in developed markets “we are on zero interest rates and unorthodox monetary policy seems to be hitting its limits.”Report Typo/Error
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