Are there any opportunities left in emerging markets?
David Hambidge, director, Premier multi-asset funds
From a valuation perspective, there would appear to be some opportunities in emerging market equities, as they have been underperforming developed markets for a number of years now.
However, this correction needs to be put in the context of over a decade of massive outperformance and, with so many investors late to the party, the region does not look particularly promising from a technical standpoint.
We know that emerging market assets have benefited significantly from a world awash with cheap dollars and the likely tapering of quantitative easing is seen as the main cause of the slide in asset prices over last three months.
Opportunities remain in emerging markets
However, while the withdrawal of liquidity is an important factor, it is also clear that corporate profitability has been impacted by both wage increases and stubbornly high oil prices.
Although markets such as India, Indonesia and Turkey have fallen significantly over the last few months, there has not been a wholesale retreat from the sector, with equities in Vietnam, Argentina and Nigeria performing well.
Meanwhile, the broader frontier markets index is also enjoying a strong year, with domestic investors having a far greater influence on share prices than is the case in other parts of the world.
Frontier markets have, until now, been pretty much ignored by overseas investors so, unlike emerging markets, there is no real danger of being crushed in the rush for the exit.
In summary, emerging markets will continue to face a number of headwinds over the next few months and, while share prices partly reflect this, valuations are not low enough to alter the current bearish sentiment among investors. However, we remain constructive on the asset class over the medium term and would consider adding to our higher risk mandates on further weakness.
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