Taking into account macroeconomic fundamentals as well as valuations in stock markets, the manager of the Templeton Emerging Markets investment trust says emerging markets, particularly in Asia, are looking attractive and are not heading for a rerun of the late 1990s. “Back then valuations were low but the market conditions were awful, whereas now we have low valuations but the fundamentals are attractive,” Mobius said.
The manager says he is bullish on the outlook for emerging markets over the long-term and frontier markets even more so.
He expects the value of emerging markets to triple over the next 25 years, albeit with a significant amount of volatility, and recommends investors buy into the asset class while valuations are at a low.
Asian markets were hit hard at the end of the 1990s by a series of high current account deficits and currency devaluations across several countries, which in turn caused stock markets to fall, eventually causing declines in developed markets in the US and Europe.
Emerging markets have similarly suffered recently, particularly in the past 12 months after the Fed began to hint it would taper its monthly quantitative easing programme and raise interest rates.
Both the initial announcement that the Fed would reduce QE in May 2013 and its implementation of this decision in January 2014 caused a sell-off in emerging markets. The MSCI Asia ex Japan index plummeted in June 2013, losing more than 15 per cent in five weeks, and is still down 3.71 per cent.
The index lost a further 5 per cent in January 2014 after fears of currency contagion spread through the region.
Performance of indices since May 2013
Source: FE Analytics
In contrast, developed markets have risen steadily over this period, with the MSCI Europe ex UK index up 12.59 per cent, the S&P 500 up 7.15 per cent and the FTSE All Share up 6.96 per cent.
The falls in emerging market indices as well as currency woes stirred memories for many investors of the Asian financial crisis more than 15 years ago.
Another common worry is the scale of current account deficits run by a number of emerging market countries – especially with the so-called “fragile five” of Brazil, Indonesia, Turkey, South Africa and India – and the parallels with the crisis of 1997.
Jan Dehn, head of research at Ashmore, believes too much is made of the scale of current account deficits in emerging market economies, which he says are far more robust and less exposed to shocks than they have been in the past.
“We are going to see some substantial growth in emerging markets. Today, total emerging market equities and fixed income in the asset class is worth about $25trn, but we expect this to rise to about $80trn by the end of the decade,” he said.
“Too much is made of current accounts, but they are just little red flags to wave if you want to raise fear. It is the favourite subject of investment banks. They can always find a country that has a current account deficit, but the reason they have one is because you have to import capital.”
“The only way you can do this is by having a deficit in your current account, this is mathematics. Every time there is a sell-off, people always point and say there is a deficit in the current account of a country. However, there is very little change in the deficits.”
He added: “Whenever they seem to be getting out of line, they are adjusted very quickly.”
Given South Africa, India, Brazil, Indonesia and Turkey have all been quick to address their current account deficits, Dehn says they should no longer be known as the “fragile five”, but the “frugal five”.
He adds that the greatest misconception about emerging markets is that their growth has been achieved through stimulus, current account deficits or big increases in debt.
“There is no evidence growth has been achieved by any cyclical means, it looks like this is a structural story that has much more to do with the gradual improvement of countries that are coming from a low income status.”
“From a fundamental perspective, emerging markets are pretty robust.”
Despite his positive outlook for emerging markets, Dehn recently told FE Trustnet that the asset class could be due another correction in the next 12 months. However, he said this would present a buying opportunity.
Mobius has been investing in emerging markets for more than 25 years, launching the Templeton Emerging Markets investment trust in 1989. Someone who invested in the fund in 1995 – as far as FE’s data goes back – would have made 461.95 per cent.
Performance of trust since Jan 1995
Source: FE Analytics
The investment trust is currently trading on a discount of 9.8 per cent.
