The Return of Emerging Markets
Emerging markets have suffered a downturn in 2018. The threat and then reality of a trade war, accompanied by the strengthening dollar, have contributed to a bear market. Currencies have weakened in the vast majority of developing nations, while Turkey and Argentina have suffered a financial crisis. The MSCI Index has fallen around 16% so far this year.
While this all sounds like bad news, there are also some positive signs. We should not forget that these markets remain the fastest growing economies in the world. The IMF estimates that emerging markets will grow 4.7% in 2019, more than double the predicted growth for developed countries.
Every market crisis, be it centered around currency, equity, commodity or fixed income, always creates winners and losers. As investors, it is our duty to ensure that we invest in winners.
The current environment is similar to that of 1987 when I launched the first listed emerging markets fund. The sharp drop in currencies and the fall in the market gives investors double the opportunity for a potential upside.
Countries like Argentina and Turkey, that have suffered the most from the recent crisis, can offer the greatest opportunities. In terms of its economic size and potential for exporting, Turkey could be particularly interesting. However, this is contingent to whether the volatile political situation calms down. At this stage, it is all about winning back the confidence of investors. With the Lira down, any exporter will be in a good position to trade with developed countries. At the same time, the currency crisis makes investments in Turkey relatively cheap.
Similarly, the currency depreciation around the world is a big opportunity for India to grab a bigger share of the exports market, but it will need to ease export norms. India did not stay untouched by the current EM turmoil: the Indian equity markets struggled through the third quarter of 2018 due to the unhappy combination of higher US rates, a stronger US dollar, resurgent crude oil prices, and a domestic liquidity scare that threatened to snowball into a solvency issue.
Despite all this, an attractive entry point has emerged for the long-term investor. Credit growth has accelerated to a five-year high whilst inflation continues to remain benign below 4%. Price to book multiples are now below their long-term averages of 2.5x and foreign ownership has shrunk sharply to healthier levels. Despite this, earnings growth estimates are amongst the fastest across the emerging world with more than 20% and 18% expected for 2018 / 2019 respectively.
Furthermore, India could benefit from an ongoing trade war between the U.S. and China (should it continue). The latter may not be able to export a number of things and perhaps India could replace China in that regard. India could leverage some of the manufacturing capacity moving out of China.
As investors, these changes to the status quo and the knock-on effects are where we see the greatest opportunities. Mobius Capital Partners has leveraged its expertise to invest in a number of exciting companies across emerging and frontier markets, including China, Brazil, Indonesia, Poland, Russia and Turkey.
We are currently looking at several interesting Indian companies. These firms have strong business models and have been facing uncertainty due to the recent economic crisis. We believe they not only offer value but also have great potential for environmental, social and governance, and operational improvements.
As a result, I believe next year we might be seeing more money flowing back into emerging markets stocks.
The article appeared in Sanctum Wealth Management's Investment Outlook 2019