With emerging market equities losing half their value over the last 12 months, long-term bulls are touting a buying opportunity. What is more surprising is that many cling to the “decoupling” theory to make the case.
“The credit crisis has shown that investors must be wary of the ‘decoupling’ sales pitch,” warned research consultancy Celent in a recent report. “Investors should not view diversification and uncorrelated beta as the primary purpose of an emerging market investment. Instead they should see them as a source of new returns (and new risk).”
But a new survey by S&P Fund Services reveals fund managers taking issue with this. “Managers agree that the decoupling idea has clearly been discredited as it applies to stockmarkets,” said S&P Fund Services lead analyst Alison Cratchley. “Even so, they think it may apply, at least in part, to emerging economies.”
One of those surveyed, Thomas Gerhardt at DWS Investments, pointed out that emerging economies are still growing, unlike their developed counterparts – agreeing with many outside the survey.
“In the short term investors can buy UK, US or European equities and expect a return nicely above 10 per cent when markets recover,” said Gary Dugan, CIO at Merrill Lynch Global Wealth Management. “But in the medium- and long-term the [BRICs] will remain the engines of global economic growth.”
Schroders’ head of emerging markets, Allan Conway, pointed out that, unlike developed economies, most emerging economies were not over-leveraged and face only a short-term reduction in liquidity.
Both Hugh Hunter at WestLB Mellon and Schroders’ Louisa Lo told S&P that their portfolios are increasingly driven by domestic-focused companies, and Wojciech Stanislawski at Comgest said that this was especially the case for India.
Elsewhere, strategists are keen to stress that there is diversification within emerging markets too.
“Commodity-consuming countries like India and China stand to benefit from lower commodity prices, unlike the commodity-driven economies of Russia and Brazil,” observed Gianluca Tarolli at LODH. “This highlights an important point about BRICs - the fact that they are not a homogenous group."
An Oliver Wyman report for Nomura found that using a combination of specialist regional managers could add 2 per cent annualised compared with a single global emerging markets manager.
“We would expect some investors in this asset class to take a regional specialist manager approach in order to improve returns and lower risk,” said Mark Roxburgh, Nomura’s head of client services, UKEMEA.
Investors certainly appear to be buying: Baring Asset Management’s annual survey of the top-100 UK pension schemes found investment in Asian equities going up even as overall allocation to equities fell, while a survey of Northern European pension funds for Nomura Asset Management found them planning to increase emerging market equities by 4-10 per cent.
