Emerging market equities have been the main beneficiary of the renewed risk appetite seen so far in 2013. In the week ended 16 January, for example, $5.83bn (ÂŁ3.67bn) flowed into the asset class out of the total $$7.19bn that moved into equity funds. At the same time, investors withdrew $1.79bn from the US equity market. Could they be onto something?
There is no apparent performance rationale for this switch – while emerging markets have been good performers since the start of the year, with the average fund up 3.5%, they have been far outstripped by US equity funds, which have averaged 7.3%. Asian stocks – and China in particular – have admittedly seen stronger performance but there is no doubt developed markets have led this year’s rally.
Equally, there is no compelling shift in the economic picture in emerging markets. The Chinese government did announce last week the economy grew 7.9% in the final quarter of 2012, which was up from 7.4% in the third quarter and showed building momentum after a two-year slowdown, but it is still a long way from the exciting 9.3% growth seen in 2011.
At the same time, India is still struggling with an inflation problem, Brazil saw economic growth of just 1% in 2012 according to current estimates, and Russia’s 3.6% growth rate goes little way to compensate investors for the political risks.
Nevertheless, investors are reasoning emerging markets have a number of factors in their favour – for example, growth may not be strong but it is better than that available in developed markets. The International Monetary Fund is still predicting 5.6% growth for emerging markets over 2013, compared with 1.5% for developed markets, which should provide emerging markets companies with a tailwind when generating earnings.
Equally, investors are not yet paying a premium for that growth as valuations generally look reasonable in comparison with both their global peer group and with history. Markets such as those of China and Russia trade on single-digit price/earnings ratios, compared with 15.5x for the S&P 500 index.
There are also specific policy actions helping to give a boost to some markets – for example, in 2012, the Chinese State Administration of Foreign Exchange handed out around $16bn of quotas, called Qualified Foreign Institutional Investors (QFII), to foreign investors, which has helped send markets higher.
The picture is muddied because it is obviously not just emerging market companies that benefit from emerging market growth. Nevertheless, investors have decided that if they are going to take risk, it needs to be a risk worth taking. Emerging markets tick that box.
JANUARY 2013
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