May 29th 2009 | Hexam Capital
Emerging markets will continue to outpace developed markets although some caution is required following the strong rebound, says Bryan Collings, manager of the Ignis HEXAM Global Emerging Markets Fund
A degree of caution must be taken following the recent strong rally in emerging markets despite a bullish outlook for the region over the longer term, says Bryan Collings, whose Ignis International HEXAM Global Emerging Markets Fund has risen 26.7% in the first four months of 2009*. The fund has outperformed the MSCI Emerging Markets Index by 12.3% and the MSCI World Index by 31.4%. “We embraced the recent irrational volatility in emerging markets and this boosted fund performance,” Collings explains. “But normality now appears to be returning as investors begin to re-appreciate the fundamental appeal of the asset class. We have, therefore, taken some risk off the table despite remaining bullish in the longer term.”
Strong rebound
Emerging market indices rebounded strongly from their October 2008 lows, with the MSCI Emerging Markets Index up 54.1% at the end April 2009. In the first four months of this year the index rose 14.4% compared with a fall of 4.7% in the developed market focused MSCI World Index, while more than $10bn of portfolio flows entered emerging markets during a six-week window in March and April.
The worst is over
Economic data continue to suggest that the worst of the economic storm has passed. China has been a significant prop, continuing with its dual-pronged strategy of loose monetary policy and fiscal spending. This, coupled with some better newsflow, has led the market to upgrade 2009 China’s GDP growth forecasts towards the critical level of 8%. Chinese support, alongside improving data from the US, has given investors confidence that emerging markets’ strong performance is more than a dead-cat bounce.
“Emerging markets will continue to outpace developed markets in the recovery,” says Bryan. “While initially this will be driven by investors buying back exposure that they had been forced to sell as part of the deleveraging process, the fundamental long-term drivers of the markets remain firmly intact.”
Long-term outperformance
Key structural factors suggest emerging markets will drive global growth in the coming decade – notably lower household debt, better economic balances and developing capital markets. Despite this, emerging markets still trade at a 10% discount to developed equities on 2009 earnings estimates, and a 20% discount on 2008 earnings. This gives plenty of scope for a re-rating of emerging markets, which would drive further long-term outperformance.
Favoured markets
HEXAM analyses investment opportunities based on five key drivers: growth, liquidity, currency, management and valuations. The team currently favours China, Russia, Indonesia and Brazil. China is supported by a substantial stimulus package, significant reserves and a population that is only just beginning to consume goods and services. In contrast, at the end of last year Russia was widely reported to be bust, despite owning the world’s third largest reserves. The ensuing retreat by international investors left Russian equities staggeringly cheap. Now the world has realised Russia is not bust, its stock market has rallied some 77% from February lows. In Indonesia, rising commodity prices are positive for the rural income sector of the labour force while the firmer exchange rate and continued decline in inflation led to a rate cut for the sixth consecutive month in May. Interest rate cuts are also expected to provide support for equities in Brazil, where the market continues to trade at a 15% discount to broader emerging markets.
The UK-domiciled Ignis HEXAM Global Emerging Markets Fund (launched February 2009) is a mirror of the Ignis HEXAM International Global Emerging Markets Fund.
*Source: Lipper, NAV to NAV, gross income reinvested as at 30/04/09. For I class based on the GBP share class.
By 08/05/09 the Ignis International HEXAM Global Emerging Markets Fund, a mirror of the more recently launched onshore fund, had risen 92.5% from its low on 20/11/08. Source : Lipper, NAV to NAV, gross income reinvested as at 08/05/09. For I class based on the GBP share class. This compares with a rise of 17.9% on the FTSE All-Share Index over the same period.
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