Confidence returns in emerging markets

The MSCI Emerging Markets index has delivered a positive 4.97 per cent for the year to date to August 6, although among the Bric countries it has been India that has powered ahead.

Data from FE Analytics shows the MSCI India index has delivered a return of 18.99 per cent, with the MSCI Brazil index its nearest rival at 10.92 per cent. But the MSCI China and Russia indices are significantly lagging their Brics counterparts, with China delivering a modest 4.33 per cent, while Russia is in the red with a loss of 19.1 per cent.

Andrew Lister, co-chief investment officer at Advance Emerging Capital, notes: “An interesting market has been India and it shows people have very short memories. In the second and third quarter last year everyone hated India. It was one of the ‘fragile five’; its currency was collapsing and its current account deficit was a source of consternation.

“Fast forward 12 months and everyone loves India; there is reform coming, the election is out of the way and you’ve even made handsome returns this year. It’s a market we like and we’re following it pretty closely because of strong performance and reasonably high valuations.”

In terms of elections Brazil, which has already performed quite well, could see a ‘watershed’ should the incumbent president Dilma Rousseff lose to the main opposition and pro-reform candidate Aécio Neves.

Mr Lister notes: “It will be an interesting moment for Brazil. It looks like Rousseff will get re-elected, but the market has been pricing in change of some description; either change under the current government or a surprise loss for Rousseff.

“It’s a big market with lots of stocks and there is value to be found there, and it has been unloved for a very long time.”

Neil Denman, global emerging markets fund manager at Polar Capital, notes that valuations in emerging markets have come from a low starting point of roughly 2x price/book value to 1.6x, which means they are “looking okay”.

Although he adds: “When you get into nitty-gritty details, things can be a little bit different and certainly the cheap stuff seems to be very low quality and there are also some very expensive stocks within emerging markets as well.”

Mr Denman highlights the reform and self-help themes as key drivers for the emerging markets, noting that in India “there is a paramount shift in that economy and the governance of that economy”, which can be seen as a “healthy” development.

Mr Denman adds: “On a sectoral basis there is also massive change between pre- and post-elections, such as in India we saw a massive change in what was performing well post-election compared to what was performing well pre-election, so it could catch some people unawares.”

Mr Lister adds: “It is all down to confidence. Last year it was very easy for investors to have their confidence shaken when they were seeing percentage moves in currencies every single day, when they had the alternative of investing in their home markets that seemed to be recovering very nicely.”

Nyree Stewart is features editor at Investment Adviser

Emerging markets: themes and drivers

• Geopolitical risk

The Russia-Ukraine conflict is the biggest concern on the emerging market map, as the tit-for-tat sanctions between Russia and the developed world threaten to have a knock-on effect on other emerging markets.

• Reform agenda

This year has been key for elections in emerging markets, with an estimated 17 variations of elections in 2014. The victories of apparent pro-reform candidates such as Narendra Modi in India and Joko Widodo in Indonesia appear to be increasing investor confidence in these economies.

• Demographics

In emerging markets, managers point to the continued opportunities provided by the growing middle classes, the rising GDP-per-capita levels, the low penetration of a number of products and services, and poorly served areas such as healthcare, education and infrastructure.