Polar’s Calvert: ‘Hard to be positive’ on EM equities

Polar Capital’s William Calvert has issued a bearish commentary on his own asset class, admitting it is “hard to be positive” on emerging market equities currently.

Mr Calvert, who manages the firm’s $418.8m (£270.2m) Emerging Markets Income and $9.4m Emerging Markets Growth funds, also cast doubt on the assumption that the fall in emerging markets indices automatically translated into a buying opportunity.

In the past three years, the MSCI Emerging Markets index has dropped in value by roughly 1 per cent, while the MSCI World index has risen 40 per cent. This disparity has led some observers to declare emerging markets a buying opportunity, but Mr Calvert said money would likely only flow into emerging markets if the sector was “so cheap that it is irresistible”, adding that “we are some way off that”.

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The key to turning around the fortunes of developing market equities, he said, was “internal improvements and better management of these economies”.

Mr Calvert pointed to Mexico as the most obvious example of positive political movement but he said, in general, it was “quite hard to see things changing” in emerging economies.

The manager added that the major emerging economies of India, Brazil and Russia all had significant issues to contend with. In India Mr Calvert predicted a lack of action until after the country’s general elections next year, while in Brazil he said reforms were needed to bring the South American behemoth back to a higher level of economic growth.

However, he said the situation in China was not as bad as some bearish commentators were suggesting, arguing that the government had a firm grip on what was needed to reform its economy.

“Chinese growth needs to be quite a bit slower, and the government seems to be pushing that way,” Mr Calvert said.

“People seem to think growth should be up at 8 per cent, but I take the opposing view and would be very bearish if growth went up to 8 per cent because the resultant debt would be unsustainable.”

He dismissed talk of a financial crisis in China, arguing that “the debt levels are not too high and a lot of it is in the government’s hands, so while bad debts will be high they will be in the government sector”.

In spite of his concerns about emerging markets, both of Mr Calvert’s funds have outperformed the MSCI Emerging Markets index and the IMA Global Emerging Markets sector since launch, according to FE Analytics.

A big part of that performance has come from the infrastructure sector, a major theme for Mr Calvert’s funds, and the manager is banking on infrastructure continuing to outperform.

In particular he highlighted Brazil, which has historically had a low level of spending on infrastructure but was increasing construction in preparation of hosting both the football World Cup and the Olympics in the coming years.