The last few months have been some of the most turbulent in modern financial history with lack of investor confidence and alarm at the failure of the authorities to contain the European sovereign debt crisis.
We have seen downgrade in US government debt as the AAA rating was removed by Moody’s and S&P and a whole raft of downgrades in European sovereign debt as the rating agencies expressed concern at the slow pace at which the authorities tackled the issues.
Markets have fallen sharply, with double-digit declines across equity markets. European and emerging market equities were the worst hit. There were few safe havens except for the biggest government bond markets and, positioned correctly, multi-asset funds, government bond funds and cash funds.
It has been the investment equivalent of Arsenal’s woeful start to the football season, and likely to have caused just as many headaches.
However, just as the recent 5-3 victory against Chelsea showed that reports of Arsenal’s demise have been greatly exaggerated, we believe it is wrong to write off the world’s emerging markets on the basis of few months of disappointing performance.
We believe the medium to long-term prospects for emerging economies remain compelling. The International Monetary Fund is forecasting annual GDP growth of 6.1 per cent across the emerging world in 2012, triple the rate likely to be achieved in the world’s advanced economies. China is still looking at 9 per cent growth next year, and India a very healthy 7.5 per cent, helped by favourable demographics.
All the evidence suggests the four biggest emerging economies of Brazil, Russia, India and China are still on track to overtake the biggest seven developed economies by 2027. China’s economy is already the second biggest in the world and India’s is the fourth biggest by purchasing power parity. Share price valuations are also at attractive levels. The Russian market is trading at a multi-year low while China stocks are as cheap as they were in 2008 on a 12 month forward basis.
If you accept that faster economic activity eventually translates into corporate profits growth, there is no question that this is a supportive environment for companies operating in these markets. From Taiwanese companies manufacturing high-tech components for iPhones to Russian gas producers, it is possible to generate strong profit growth.
As these economies continue to expand, we expect asset flows to increase as investors reduce exposure to the developed world. We also expect the size of these markets in the representative indices to grow rapidly, led by international pension funds. There will be advantages in being invested early, ahead of these large institutional investors.
It is understandable that many investors wanted to reduce risk in recent months. However, the deal which came out of the latest meeting of the eurozone heads has gone a long way to repair damage investor confidence. In turn, attitudes to risk on the part of investors since the news came out have caused a surge of strength in emerging equity markets, which we believe will continue.
Setting Europe right will require more work. However, if you want your portfolio to benefit from the expected long-term growth to come from emerging markets, this deal might just be the equivalent of Robin van Persie’s hat trick in the Chelsea game – confidence-boosting result likely to act as a catalyst for nimble market participants.
Ian Pascal is head of marketing and communications at Baring Asset Management