By Kristoffer Stensrud
After several years of significant economic growth, particularly relative to the western world, it was understandable to expect that 2013 would be prosperous for emerging market investors. In fact, the opposite has happened and returns relative to those from developed market countries have not been as poor since the 1997-98 Asia crisis. Large amounts of capital have flowed from emerging markets back to industrialised countries. At the same time real interest rates in the latter have risen from the deep and are reappearing above the surface.
It is interesting to note that countries in the developing world have not only had the highest long-term growth, but have also started to put in place the central building blocks needed for a functioning welfare state such as healthcare, education and transparency.
The past 12 months have admittedly revealed a number of holes in global emerging markets. Surprisingly, among the largest of these has been the lack of stimulus from China. Despite the introduction of the new regime into power in March this year, which many had eagerly anticipated would bring a new growth profile, China instead decided to pursue qualitative rather than quantitative growth. Renewed environmental efforts, a strengthening of the service sector, a more socially equitable distribution of income and better pension schemes are now China’s priorities. Investors who had hoped for more steel, ships and bridges have instead seen solar and wind power as well as a strong anti-corruption campaign against doctors and pharmaceutical companies, both locally and overseas.
Understandable uprisings
Given an unpalatable combination of repressive religion and corrupt leadership, the riots in the Arab world in 2012 could have been anticipated, but this year’s protests in Turkey and Brazil, which have been among the leading countries in improving social and economic conditions, were a big surprise. Nevertheless, society will ultimately move forward through positive discourse and differing opinions.
As investors, we can capture some of these trends, but not all of them. People’s needs for better homes and greater mobility – both physical and social – are still there. These developments will continue unabated but those countries which have a consistent balance-of-payments surplus, due to a greater appetite for consumption than production, are in a phase where they require price corrections; something we have seen this year.
Global emerging markets are increasingly heterogeneous, however. Each country and each religion follows its own cycle and this is something that not everyone has taken on board.
Brighter outlook?
Generally speaking, the pricing of companies in emerging markets, relative to both earnings and asset values, is now down to levels we have not seen since the late autumn of 2008 and the winter of 2003, and not far from the depths of the Asian financial crisis in 1998. The discount relative to developed markets is currently around 20%, at a time when growth dynamics are better and corporate governance is improving in most emerging market countries.
Over the long-term the key is at what price you can buy companies based on their earnings, growth prospects and fundamental value. Given increasing long-term bond yields and investors’ growing risk appetite, it may be the beginning of the end of the relative downturn in emerging markets and more likely that they will develop positively in line with improving global growth prospects.
Kristoffer Stensrud is a portfolio manager at SKAGEN Kon-Tiki
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