Jonathan Asante, the head of global emerging market equities at First State Investments, has warned that some emerging markets and stocks “are now entering bubble territory”.
In an outlook and commentary piece sent to shareholders, First State says policy makers appear to be recreating the conditions of 1999 and 2007, just before stockmarket bubbles around the world burst.
Asante names another factor this time round, namely the risk of China winding down its infrastructure spending, which would cause difficulties for commodity-related economies and companies.
“We can only speculate what the result will be this time but it could be worse than what experienced in 2000 and 2008,” Asante writes. “It is more important than ever not to sacrifice quality for valuation given how risky things are becoming.”
First State is still heavily invested in consumer staples companies to get inflationary protection. Yet the team has turned to less popular areas, such as telecommunications and what they consider to be the best run technology companies, as consumer companies are becoming overly favoured.
“Valuations have reached rich territory, tilting us towards a more defensive stance,” Asante writes. The valuation discount of developed versus global emerging markets means that many companies in developed countries, especially those with heavy exposure to emerging markets, are becoming more and more interesting to investors.
As Asante and his team have turned cautious, they are focusing on companies with strong franchises and sustainable cash flows. Economic conditions are becoming increasingly challenging for global emerging market managers as monetary policy in the west risk causing bubbles. In several countries, most notably India, inflationary pressures are rising and interest rates may too.
First State’s Latin America team recently sent a separate note to investors in which it warned of overheating in the economy. Asante has been one of several high-profile emerging markets managers who have acknowledged that there is no direct correlation between ongoing economic growth and stockmarket returns.