Emerging market funds were amongst the outperformers in 2016, but what does the future look like for investment in this dynamic asset class? Brian Tora takes a look at the issues.
Nearly 30 years ago I was involved with the launch of an index tracking vehicle, aimed at replicating the returns of seven of the smaller Asian markets. It was called the Tiger Tracker and sought to cash in on a growing appetite for passive funds and for the exciting markets of the emerging world, as it had become known. Prior to the 1980s, Emerging Markets were very much the province of a few specialist fund managers, like Templeton whose Mark Mobius strode these markets like a colossus.
It wasn’t the most successful of funds. For a start, replicating the indices of seven small, often illiquid, markets was never going to be easy. Nor was it. A generous tracking error was built in and was needed. Perhaps it was too complex an instrument for the average investor to understand at the time, though heaven knows, investment vehicles these days include some very sophisticated techniques that we could have only dreamt about back in the mid 1980s.
However, it is worth bearing in mind that there is more to Emerging Markets than just the aspirant nations of the Far East. A few years ago Bloomberg published a survey into these markets, grading them according to GDP growth, inflation, government debt relative to GDP and ease of doing business. Interestingly, only six of the top twenty were Asian countries, though for some reason India did not feature in this particular table. True, the top three places were taken by Asian nations, but South and Central America, Africa and Europe all contributed to the mix of markets worth watching.
BRICs and MINTs
As I recall, it was Jim, now Lord, O’Neill who first coined the phrase BRIC – Brazil, Russia, India and China. His contention was that these were the major players in a world where economic power was migrating from the traditional developed countries and that investment in them needed to be taken seriously. Subsequently, the term MINT came into fashion as the next tier of Emerging Markets. Mexico, Indonesia, Nigeria and Turkey all shared with their BRIC counterparts large, relatively poor, populations, even if they lagged the giants of China and India significantly in numbers. Only three of the eight countries in these two groups are in Asia.
In the three years since Bloomberg published their table, a lot of water has flowed under the Emerging Markets’ bridge. With China still dominating sentiment in this sector to a significant extent, it is little wonder that fortunes have fluctuated as they have. Moreover, a widely promoted belief that the future for investors lay in the developing world led to extravagant valuation levels being attained in many areas. I well recall chairing a conference less than a decade ago where a respected fund manager opined that investors need look nowhere else than Emerging Markets for consistent long term growth.
Different dynamics
He was proved wrong, of course, but that is not to say these markets should be written off. The varying fortunes of some of these countries over recent years serve to underscore how very different the dynamics can be. Russia’s fall from grace owes much to the economic sanctions put in place following the annexation of Crimea, but even more to the fall in the oil price. Brazil has seen its economy shrink massively and has been mired in political scandal. Nigeria, which also didn’t feature in the Bloomberg top twenty emerging nations for investment, has also suffered from a lower oil price, while political unrest and internal strife has also played its part.
The Global Emerging Markets sector of the Investment Association’s list of investment funds is large and varied. I look at it regularly and marvel at the changing fortunes of the managers that feature. It demonstrates how difficult it can be to cope with as wide and diverse a constituency as what we term the emerging world, though there are funds that do manage to avoid the very wide swings that some suffer.
Yet the underlying themes remain intact. Many – not all – of these lesser developed countries have large populations which enjoy a strong work ethic. Of even more importance, a lot of these countries’ peoples are young and the demographic pressures we face in the developed world have yet to impact. While the risks associated with investing in this sector should not be ignored, I wonder if they are any greater than, say, backing the US market with its expensive share valuations and an untried president. I know where at least some of my money is going.
