Emerging markets are unlikely to ever again experience the sector-wide outperformance seen at the beginning of this century, according to Neptune’s chief economist and chief investment officer James Dowey.
He said despite the entire sector being relied upon to outperform developed markets in previous years, future returns would be isolated to select countries.
An investor would have gained a 370 per cent return from an equal-weighted index of Bric markets between 2001 and 2011. But Mr Dowey said while individual countries may do well, sector-wide returns of the past are highly unlikely.
“My view is that it’s almost inconceivable that we return to the types of outperformance that we saw in the 2000s decade in emerging markets, and we need to be strongly cognisant of that.”
He said the politics and economics of individual countries now vary greatly, and common factors that encouraged growth are no longer as consistent.
“Emerging markets, on an individual basis and largely around political events, still have this capacity to be extremely volatile – both on the upside and the downside. You only have to look at Brazil over the past six months or so as an example.
“What I’m referring to is a broad asset class of outperformance and I think it was powered heavily by a psychological dynamic; what I find inconceivable is that that dynamic could be constructed again in the near term. It would stretch the credulity of investors too much. They’ve lived through the past five years of disappointment.”
However, Mr Dowey did recommend looking to the past when determining emerging markets’ outperformance, as they tend to alternate with developed markets.
Emerging market stocks outperformed developed market stocks in the 1900s, the 1910s, the 1930s, the 1960s and the 1970s, and in the other five of the 10 decades developed markets delivered superior returns, he noted.
Ewan Thompson, manager of Neptune’s Emerging Markets fund, said acronyms like ‘Bric’ were unhelpful because “they’re different economies driven by different factors”.
“There’s a lot of things in emerging markets that isn’t a Bric,” he added.
The £7.2m Neptune Emerging Markets fund returned 1.6 per cent over three years, while the IA Global Emerging Markets sector declined by 3.8 per cent during the same period, according to FE Analytics.
