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Spectator Money - Features

You can still sift for gems in emerging markets

Growth may be fading, but the star performers still offer better returns than the developed world

1 October 2016

8:00 AM

1 October 2016

8:00 AM

The aura that once surrounded emerging -markets has dimmed lately. Of the original ‘Bric’ nations, the group that were supposed to keep global growth chugging along in the post-financial-crisis years, Russia and Brazil are mired in recession while China is slowing and struggling. Of the quartet, only India is in rude economic health.

This year, output will grow faster in the US than in Nigeria, Africa’s largest and most populous economy, according to IMF projections. Britain will outperform South Africa, a late addition to ‘Brics’ (with an s). Sweden will outpace both Thailand and South Korea, the latter still listed by research firm MSCI as an emerging nation. And so on.

To emerging-market bulls, all this is a problem. Growth has long been seen as the one ingredient these once-vibrant nations can’t do without: the spice in the economic curry. Speak to any fund manager invested in developing-world stocks and bonds, and the word is used repeatedly. ‘Growth is a key appeal of investing in emerging markets,’ says Stuart Culverhouse, head of research at London-based frontier investor Exotix. David Park who runs emerging-market funds at -Carmignac, a French outfit with €52 billion in assets, says the same: ‘When investing in emerging markets, one is effectively investing in growth.’ With that -central tenet fading — and given that emerging markets are inherently risky, lacking the legal protections of the developed world — what remains?

Well, plenty, as it happens. Growth may be a -scarcer commodity in the emerging world than many would like, but solid returns need not be elusive, so long as you know where to put your money to work.

Take plain old equities. Brazil’s leading stock exchange, the Bovespa, was up 43 per cent this year as at 7 September. Russia’s Micex hit an all-time high that same day, having risen 18.5 per cent on the year. Contrast that with the FTSE 100, up 9.9 per cent over the same period, or the Nasdaq Composite, up 5 per cent.

One of the best and fastest ways to gain exposure to these markets is through exchange-traded funds (ETFs), which Christopher Silvester writes about on page 20. Amundi’s Brazil ETF, which tracks larger stocks on the MSCI Brazil index, gained almost 40 per cent in the year to 14 September, with Lyxor’s Brazil ETF and BlackRock’s iShares MSCI Brazil ETF both up by around 39 per cent.

Cheap to trade, ETFs can be tracked through the day, and bought and sold through most brokers. But there are dangers. Share prices fluctuate more -heavily in emerging markets. Questions over the stability of ETFs were raised in August 2015 after some saw their values slide sharply, following a brief fall in global stock prices. Overall, though, ETFs are great ways to buy into the developing world. So the next question is: which emerging markets do you like? Ask a hundred analysts and fund managers and you’ll receive a -hundred different replies. But most agree which ones are heading in the right direction.


‘Argentina looks a great long-term opportunity,’ under new president Mauricio Macri, says Stuart -Culverhouse of Exotix. ‘Pakistan, Kenya and Colombia are also doing well, while Venezuela and Ghana are going backwards.’ Charles Robertson, global chief economist at Renaissance Capital, is a fan of Pakistan, Romania, Vietnam and Morocco. He also highlights the examples of Hungary, Poland and the Czech Republic, ‘each of which has all the attributes a country needs to make the shift from emerging to developed-market status’.

India, with its economy set to grow more than 7 per cent this year and next, is another market that few investors can afford to overlook. It has an array of deep-rooted problems that will take decades to solve, including chaotic infrastructure. But it remains a -‘positive all-round story’, says Daniel Kerbach, head of global discretionary solutions at Swiss banking group Julius Baer. It’s also ‘a great healthcare play, with 1.3 billion people, rising salaries, and a strong government push to provide more social care’.

Finally, there are troubled Brics nations that still merit a second look. Russia, as resilient as ever, has largely absorbed the double blow of western sanctions and low oil prices, while maintaining a healthy current-account surplus. The IMF projects it to return to growth in 2017 for the first time in three years.

Brazil, too, is far from the basket case it might seem. Yes, it is still enduring a prolonged period of political instability. But a new right-of-centre -president, Michael Temer, is expected to deploy the nation’s finances more wisely than his leftist predecessor Dilma Rousseff. Foreign reserve levels are rising, while the current-account deficit is set to narrow this year to 2 per cent.

A weaker currency, the real, has helped boost -Brazilian exports, suck in investment dollars, and -create a gilt-edged investment opportunity, according to Abbas Ameli-Renani of asset manager -Amundi. ‘Ten-year Brazilian local-currency debt currently yields around 12 per cent,’ he notes. ‘With inflation set to fall to 5 per cent by the end of next year, you’re left with real yield of 7 per cent. That’s the highest yield on offer in any major economy, anywhere.’

New York-based WisdomTree Investment’s -Brazilian Real Strategy Fund ETF, which gains in value when the real strengthens against the US -dollar, is up 30 per cent in the year to 14 September. A more cautious investor might opt for the VanEck Vectors JPMorgan EM Local Currency Bond ETF, which is exposed to a host of emerging currencies, including those of Brazil, the Philippines and Indonesia, and which has gained 13.7 per cent year-to-date.

Another option for the cagey — Ameli-Renani adds — is to buy shares in a blended fund that offers the buyer exposure to hard-currency (typically US dollar-denominated) bonds as well as a generous helping of local-currency debt. A good example is Lazard’s Emerging Market Debt Blend Fund, which has posted a net gain of 30.1 per cent this year.

Or investors can simply buy into a fund that offers them broad exposure to the best listed firms the emerging world has to offer: corporates that are -likely to dominate the Fortune Global 500 in the decades ahead, pay chunky dividends and might provide your grandchildren with employment.

Julius Baer’s $320 million Equity Global Excellence Emerging Market fund, up 23.9 per cent this year, owns a 2.8 per cent stake in Indian drugs firm Dr Reddy’s Laboratories, as well as shares in two of China’s rising technology titans, Tencent and -Alibaba. Slightly further down the scale, Carmignac’s €130 million Portfolio Emerging Discovery Fund offers investors access to a raft of mid-cap stocks. Its emerging markets chief David Park buys stakes in well-run firms in underdeveloped industries, from Dr Lal PathLabs, an Indian provider of diagnostic healthcare tests, to Argentine lender Banco Supervielle.

Despite the recent dimming of their halo, emerging markets as an asset class are here to stay. Growth may have slipped in many of the bigger economies of the sector, but their bonds still offer average yields of 5 per cent, against negative yield on more than half of all Japanese and eurozone government bonds.

And by and large, emerging markets are better run than ever before. ‘Contrary to their recent bad press,’ notes Abbas Ameli-Renani, emerging markets now ‘boast the biggest average current account surplus since the mid-2000s’ as well as floating currencies and low levels of external debt. Stuart Culverhouse adds: ‘You don’t see systemic emerging-market crises any more. Argentina, Ukraine… their recent problems haven’t spilled over into the wider region, or caused global contagion.’ Let’s remember that the last -systemic financial crisis was cooked up entirely in the developed world.

One final thought. If you feel no compelling desire to buy a trunk full of tropical kit and set off into the wilder world of emerging-market investing, you don’t have to. A cursory look through your existing portfolio should reveal a host of big corporate names, from Vodafone to Unilever and British American Tobacco to BHP Billiton, all of which are listed in London but highly exposed to the profits and perils of the world’s major emerging markets. They offer the best of both worlds, from the safety of your own home.


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