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François Zagamé: Emerging markets are not one entity

Viewing emerging markets as a single asset class can lead to flawed decisions among investors.


Too many investors lump emerging markets into a single asset class. They should think again.

I recently presented to an audience of clients and was asked to update them on the regional positioning of the global equity fund that I manage.

They were quite anxious to be made aware of the active weights of nearly every developed market – UK, US, Europe, Japan – asking me to justify every active position. To my surprise they did not seem too curious as to what the breakdown of my emerging markets exposure was and seemed happy enough just to know the aggregate position.

Looking closer at emerging markets, it seems to me that treating them as a single asset class may be not only be the wrong thing to do but also likely to lead to flawed investment decisions.

Developed markets are a relatively homogeneous batch with similar socio economic characteristics, including a propensity for governments and individuals to spend more than they earn, but emerging markets are a very eclectic bunch indeed.

There is very little in common between an ageing Russia and demographic powerhouses like Nigeria and Indonesia. But the differences are not restricted to growth, demographics, natural resources and other macro-economic factors. These countries have far more differentiated and uncorrelated equity markets than seems to be perceived.

Looking at price earnings as a simple yet representative way to assess equity valuations across regions will highlight the current differences. Korea, Brazil and Russia are at the cheap end of the spectrum with a 2013 estimated ex-financials price/earnings ratio ranging from 9.3 to 11.5. The same number for Mexico, at the other extreme, is 19. The range of the spectrum is quite striking. What is also remarkable is that two countries from the same region – Mexico and Brazil – have such a large valuation gap.

Looking at the three-year correlations between some of the main emerging markets until the end of August 2013 shows the correlation between the MSCI Latam and MSCI Asia ex Japan indices has only been 48 per cent. Drilling down at the country level, we find out that the correlation between the MSCI India and China indices was 51 over this period. The correlations between the MSCI North America, Europe ex UK and UK were all over 70 per cent over the same period. In other words, there is significantly greater diversity of performance among emerging markets than among developed markets.

I am convinced that going forward the relative positioning of my fund between not only emerging regions but also countries within regions is likely to have as big impact on my performance – if not bigger – as the active positioning between developed markets. The numbers seem to back me up.

François Zagamé is manager of the Old Mutual Voyager Global Dynamic Equity fund



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