InvestmentsMay 13 2013

EM stocks are becoming less correlated: Hart

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ByBradley Gerrard

Investec Asset Management’s Archie Hart has said emerging market stocks have started to become less correlated with each other as global macroeconomic uncertainty subsides.

The group’s emerging markets manager said the correlation of equity performance surrounding systematic risk-on, risk-off trades was now overstated given that investors’ fears surrounding issues such as the US fiscal cliff had diminished.

“According to Barclays, the fraction of the variance of emerging market equities that can be explained by a common driver has fallen from approximately 75 per cent in mid-2012 to less than 55 per cent currently,” he said.

“This was reflected in a high dispersion of returns in March and in the first quarter of 2013, establishing a more fruitful environment for disciplined bottom-up investing.”

The manager said he saw earnings revisions as a “major driver” of emerging market equity performance, given the “lacklustre” markets at the back end of 2012 led to earnings missing consensus estimates by 6 per cent, according to Morgan Stanley.

“The miss was broad-based, with Asia ex Japan, Eastern Europe, the Middle East and Africa and Latin America all failing to meet estimates,” he said.

“The context of a volatile macroeconomic environment, weak market returns and negative earnings revisions from a disappointing reporting season certainly seems ominous.”

However, Mr Hart said there were some positive catalysts within emerging market countries.

“China’s new leadership seems committed to continuing reforms,” he said, and “among the smaller markets, Mexico’s reform process has the potential to invigorate corporate competiveness, while structural reforms and positive demographic trends in Turkey and the Association of Southeast Asian Nations are stoking demand”.