Bryan Collings of Ignis’s Hexam boutique is urging investors to increase their weightings to emerging markets. This is because he says it is a myth that they are riskier than developed markets.
He says investors are reluctant to allocate high weightings to emerging markets because of a perceived higher volatility. However, the markets are more efficient than we think, Collings says.
He looked at data from December 1999 until earlier this year, in sterling terms and on a six-month rolling basis, and found that British volatility was higher at the peak of the market than in emerging markets.
“Volatility has declined in the UK a lot slower than emerging markets, and emerging markets have recovered quickly from a lower level. Since 2004, emerging market volatility relative to the UK has been dropping, so this is a trend that has been going on for some time.”
His research on Bloomberg shows that the volatility of the MSCI Emerging Market index is currently below one or 0.8757% of the volatility of the MSCI UK index. When looking at this on a one-year rolling basis it is even more favourable to emerging markets, he argues.
“On a daily rolling basis it would be worse, but who invests on a daily basis?”
He has also compared volatility with the FTSE 100, S&P 500, MSCI US and MSCI Europe indices, and all show higher volatility than in emerging markets.
During the downturn, Collings says he has embraced the volatility “which was irrational and not fundamentally driven” to achieve an uplift in performance of 94% from the bottom on the Global Emerging Markets fund he runs, according to the group.
He argues that American and British investors should allocate a much higher percentage of their portfolios to emerging markets, as they have been acting more efficiently than developed markets.
“These are higher quality markets, are growing faster, the demographics are better, savings are higher, they have 80% of the world’s population, consumers have no debt, the infrastructure required is enormous as emerging markets also represent 94% of the world’s land mass, and the move from the rural areas to the city is huge. It is like the US in the late 1800s.”
He adds that some economic models in emerging markets have been called inappropriate, but says that models in the developed world have been proven to be flawed.
“We should be following the savings, and if you have a view that is longer than six months, the risk is not owning enough emerging markets. If the US, Europe and UK were emerging markets, I would have no allocation to them, as I hate debt,” he adds.
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