While foreign exchange volatility will continue in emerging markets because of the “sways of balance sheet cleansing in Europe,” there are signs of a pick-up and investors can make good returns in certain countries and sectors, Tim Seymour, a partner at Triogem Asset Management, told Emerging Markets.
Seymour, whose fund manages $240 million invested in emerging markets, said there was still a high level of correlation, with shocks in advanced markets affecting developing ones.
But, while he doesn’t expect major changes in Europe over the next three to six months as its “multi-year deleveraging process” is likely to continue, he sees signs that some emerging markets are beginning to take a turn for the better.
“Emerging markets, while still very tied cyclically to developed countries, are going to come out of this faster. And in fact in certain cases they have already begun,” Seymour said in an interview. “Not all this trade is tied to the same tide of rising or falling sentiment.”
“Certainly outside the BRICs you’ve seen some pretty extraordinary performance within the emerging markets sphere, certainly when you consider what the world has been dealing with in terms of headwinds.”
A recent survey showed that investors had increased allocations in emerging stock markets, with this asset class being the largest overweight position across regions in July.
Data from South Africa, Russia or Turkey seem to show that “actually PMIs have made a turn,” although for China, “the jury is still out,” according to Seymour, who said July’s PMI data out of China were “actually reasonably encouraging.”
China’s PMI fell in July but stayed in the above-50 expansion territory, with output still growing, but analysts said the figures were a disappointment. Investors are now looking towards this week’s flash HSBC PMI figures for August to see whether the economy has bottomed.
TREND REVERSAL?
Looking strictly at the performance of indexes, emerging markets have underperformed the S&P 500 by around 3 percent over the past year but looking at exchange traded funds on the main indexes, emerging markets have underperformed the S&P 500 by more than 22 percent year to date.
“We think that that’s going to reverse and we think it’s slowly turning but without clear signals on positive global industrial conditions I don’t think you’re going to start to really recover all that ... you’re going to need good data points in China, Brazil and the U.S.,“ Seymour said.
Brazil – the second-largest emerging market after China – cut interest rates by a total of 4.5 percentage points in the past year to 8 percent to boost growth and depreciate its currency whose strength was harming its exports.
“At a time when inflation is maintained, it’s in relative range-bound control, this is very bullish for Brazil,” Seymour said.
Elements of Brazil’s easing policy “have certainly filtered into the economy,” he said, pointing to a rebound in auto sales and investment in ports and rail operators, parts of the economy exposed to the preparations for the country’s hosting of the World Cup in 2014 and the Olympics in 2017.
“It’s not an overnight trade but we continue to think that that’s a place where the macro is improving,” Seymour said.
However, analysts have said inflationary expectations in Brazil were on the rise and recent rises in agricultural prices are putting further pressure on policymakers.
Apart from these countries, Seymour likes Indonesia and Philippines, which have enjoyed good growth despite the global headwinds.
“Getting outside of the heavier weightings where a lot of the crossover investors have played over the last couple of years has been a great way to be defensive and will continue to be,” he explained.
Sector-wise, Seymour said the consumer sector was the place where investors have looked for exposure and they were rewarded.
“The millions of people in countries such as Brazil, Turkey, South Africa and India entering the formal economy for the first time – out of markets and kiosks into real department stores and retailers – this global phenomenon is still, we think, relatively nascent and implies retail growth could [increase] at multiples of GDP for many years to come,” he said.
COMMODITIES WEIGH
In some countries, larger retailers are getting market share from smaller retailers that still make up 50 percent of the local market and these are the companies to watch.
“The players that have the scale to continue to grow organically or through acquisitions are, I think, in a fantastic position and are, in many cases, fighting off global players in their markets. Or there are ways that people have been playing this through the global players,” Seymour said.
“We’re pretty constructive that the EM retail story continues to trend higher.”
In the financial sector, “the jury is out,” he said, but added that he saw opportunity for cautious investment in some emerging markets banks, as the countries see lower inflationary and interest rates environments and lower unemployment relative to their history and this means that banks “are much better placed than people have wanted to believe” from a capital and credit position.
“We think that some of the credit concerns in Brazil are overdone, we think that in some parts of Eastern Europe where at least the banks have been reasonably conservative in their loan growth there’s still opportunity [for growth in the financial sector]. We’re cautiously optimistic on the financial space,” Seymour said.
The commodities sector, however, will still be “very challenging,” with pressures to the downside and this is holding back the entire emerging markets asset class, according to Seymour, who believes iron ore prices might go back to the levels seen in the second quarter of 2009, when the global recession was in full swing.
“Iron ore always overshoots,” he said. “Sentiment could get much worse before it gets better. In that backdrop, allocations to the emerging area will remain for most cross-over investors underweight.”