First signs of an emerging market turn

Intermediaries would be forgiven for being thoroughly sick of the question. In the recent past no other poser has better illustrated Betteridge’s Law – which states that any headline which ends with a question mark can be answered with the word ‘no’.

The asset class, taken as a whole, has been a woeful performer for the past three years, at the very least.

But there are plenty of reasons why the question keeps being asked. First, with returns from most asset classes hard to find, investors of all stripes are craving new sources of performance.

Second, memories of the juicy emerging markets outperformance of yesteryear refuse to die away, however calamitous the recent slump.

Third, and perhaps most important on this list, is the sheer extent of this calamity. With each new low, the contrarian grows more interested.

There have been plenty of opportunities to ponder potential catalysts for change, the latest perhaps being a postponement of the US rate hike cycle that had so alarmed investors in developing markets.

Memories of the juicy emerging markets outperformance of yesteryear refuse to die away, however calamitous the recent slump.

From what I’ve seen, however, this contrarian mindset is almost entirely theoretical.

The topic appears a real test of managers’ professed long-term time horizons – ask an asset allocator where they see the best returns on a five or 10-year basis, and the answer may well be “emerging markets”.

But ask them if they’re actually investing in the asset class, and the response will be “not yet”.

At best, managers able to invest across the equity market spectrum have confined themselves to paring underweight positions or ‘dipping a toe in’. A more forceful move would certainly be worth paying attention to – and rays of hope do appear to be, well, emerging.

We’ve all heard that a more discerning approach to emerging markets is the right way to go given the current situation. But there are signs the sector as a whole is improving. Just look at the performance of the MSCI Emerging Markets index year to date.

True, it’s down again, but amid all the doom and gloom, the sector has outperformed US, European, Japanese and global equities in local currency terms.

Caveats abound – six weeks is no kind of time frame, the index is indeed being propped up by the performance of one or two countries, and the returns don’t take into account the currency movements that have been the bane of so many developing economies since the slump first began.

Nonetheless, outperformance at a time of such paltry risk appetite may just be worth investigating further.

Dan Jones is editor of Investment Adviser