A traffic policeman walks past a signage decoration for BRICS Summit outside the Sheraton Hotel, the venue of BRICS Summit in Sanya, China's Hainan province, April 13, 2011.JASON LEE/Reuters
When the United States is looking like the world's most promising economy, you know that emerging markets are having a tough time.
Sure enough, the former superstars are stumbling. China's economy is taking a nosedive, Brazilians are rioting and the MSCI emerging markets index has slumped 20 per cent since 2011 at a time when U.S. stocks have been hitting a succession of record highs.
Professional money managers have soured on the idea of the developing world and so have the little guys, taking money out of emerging market equity funds at a record pace and stuffing it into U.S. investments, even though the U.S. economy is hardly humming.
No doubt it is tempting to write-off emerging markets as a fading fad, a burst bubble, last decade's story – and join the rush for the exits. But there is more money to be made in moving against the crowd on this one, particularly if you take a more nuanced approach to these stocks.
Emerging markets were once essential to anyone in search of solid, long-term returns but willing to stomach some extra volatility. The demographic profile of these countries was attractive, their economic growth was strong and, best of all, their stock market gains were double-digit things of beauty.
What was there not to like? You could ignore country and company specifics and just tap into the entire universe of developing economies. Or, if you wanted to limit your exposure to the big names, you could buy the BRICs, a snazzy acronym for Brazil, Russia, India and China.
Either way, an investment in emerging markets was a big, broad bet. There is nothing wrong with that, but it pointed to rising complacency among investors that was sure to shift into widespread dismay at the first signs of trouble.
Mark Mobius, the famed money manager who has steered the Templeton Emerging Markets Fund for the past 22 years, knows all too well that he is now defending the idea of emerging markets exposure rather than promoting its winning ways.
The biggest question he faces now is about downside risk rather than upside opportunity – specifically, whether China is heading toward a hard or soft landing.
"My answer was, 'It's not landing,'" he said.
He's paid to be bullish, of course. But his enthusiasm comes at a time when emerging markets are beaten up and looking cheap.
Global asset manager GMO, never one to shy away from contrarian bets, has noticed. In its quarterly update of long-term expected returns among various asset classes, emerging market equities are now on top. Super-hot U.S. stocks are near the bottom.
But emerging markets have more going for them than their recent declines. Mr. Mobius points out that rising consumer spending remains a key reason to invest.
"People can now take care of their housing, food and clothing, and they have discretionary money that can go into other products," he said.
That should help retailers, banks and electronics companies. His biggest holdings include South Korea's Samsung Electronics Co. Ltd., Brazil's Banco Bradesco SA and China's Travelsky Technology Ltd.
He's also willing to include North American and European-based luxury goods makers that get at least 50 per cent of their sales from developing economies. Swiss watch maker Richemont SA fits the bill. Even consumer staples giant Unilever PLC is in his sights.
The rise of the emerging markets consumer is an old argument, for sure. But it is one that has been forgotten in the stampede out of emerging markets.
These countries are out of favour for now, and that makes the opportunity so much more attractive.
David Berman