Advertisement

Global investors say it's too soon to buy emerging markets

By Natsuko Waki

LONDON (Reuters) - Leading fund managers are reluctant to invest broadly in emerging markets next year as many major developing economies suffer from sluggish growth and weak corporate earnings.

But instead of abandoning the asset class, participants at the Reuters Global Investment Outlook Summit say they will hunt for companies in specific sectors such as consumer goods and technology that they believe will outperform overall markets.

"It's too soon to come back aggressively into emerging equities," Amundi's Chief Investment Officer Pascal Blanque said. "The contribution of emerging economies to global growth will stop next year. But... my message is don't throw the baby out with the bathwater. You've got to discriminate and remap."

Participants in the three days of the summit so far collectively manage assets of nearly $4 trillion (£2.48 trillion).

In recent years investors have poured funds into emerging markets, seeking better returns than those offered in developed economies which have been flooded with cheap cash by central banks trying to stimulate growth.

However, after the U.S. Federal Reserve suggested in May it would scale back its money printing, that trend has reversed and emerging economies with large current account deficits - the "Fragile Five" of Brazil, Turkey, South Africa, India and Indonesia - have suffered the most.

Blanque said methods of financing, currency valuations and countries' dependence on commodity revenues would be some of the yardsticks with which to redraw the emerging map. "Many Asian economies are well-positioned in this map," he said.

Emerging equities measured by MSCI <.MSCIEF> have gained just 4.6 percent so far this year, compared with more than 25 percent in developed stocks <.MIWO00000PUS>.

Emerging stocks have underperformed developed counterparts for the past three years, while emerging local currency and dollar debt markets have lost around 7 percent.

"EM has underperformed for 3 years. However, earnings dynamics remain poor... It's another year for favouring DM over EM," said Philip Saunders, Investec's head of multi-asset investment business.

Developed equity funds attracted nearly $240 billion this year, compared with emerging ones which lost $11 billion, according to Bank of America-Merrill Lynch.

Participants also said it was also important to move away from capitalisation-weighted emerging indexes which favour big state-controlled companies where earnings tend to be poor.

This is especially true in China, where a series of structural reforms designed to rebalance the economy away from exports to domestic consumption would slow the growth of many state-controlled banks and construction firms.

Instead, consumer-related sectors may outperform, as well as any technology companies which may list their shares, according to Didier Saint-Georges, member of the investment committee at Carmignac Gestion.

"2014 is the year of active management... If you just buy the equity index it's not where you are going to do very well. It's a lot of hard work to find those companies," Saint-Georges said at the summit, which ends on Thursday.

Changes to the structure of emerging economies, including developing a domestic savings base and pension reforms, will also benefit these markets.

Latin America is a step ahead in building up an institutional domestic savings base, having reformed its pension systems after its debt crisis of the 1980s. Mexico, Chile, Peru, and Colombia all have relatively high savings rates of above 20 percent of GDP, according to the World Bank.

Chile is the highest-ranked emerging economy after Singapore and Taiwan in BlackRock's Sovereign Risk Index, which rates credit risk through a broad list of fiscal, financial and institutional measures.

"The structure of financial markets in most emerging economies has got to mature... This is a big challenge for the emerging authorities to deepen and broaden the domestic client base - channelling the local savings into the local markets and developing pension funds at the same time," Blanque said.

"In the meantime, those markets will import volatility, just because they are held to a large extent by non-residents."

Follow Reuters Summits on Twitter@Reuters_Summits

(For other news from Reuters Global Investment Outlook Summit, click on http://www.reuters.com/summit/Investment13)

(Additional reporting by Sujata Rao and Carolyn Cohn; editing by David Stamp)