Antti Raappana, head of Global Emerging Markets Solutions at Danske Invest has told the recent Nordic Investment Managers Forum in Luxembourg that there are a number of factors behind the recent revival in the asset class.
You describe EM as a transformed asset class. What are the major changes?
EM is now more diverse asset class than before. Furthermore equity markets now reflect rapid change in consumption patterns and role of IT has grown substantially and the role of commodities decreased markedly.
Do we see a revival in emerging markets?
Yes. There definitely is a renewed interest towards emerging markets, especially when interest rates in the western world are low and expected to stay there and when equity market multiples, especially in the US are on the expensive side. When Emerging Market currencies and stocks ceased to just fall earlier this year, it created a window for investors to take another look at what is actually going on in EM. Now I would argue, that international investors view EM in more realistic and constructive way, which has led to revival of fund flows.
Is this justified? Should investors still buy EM-equities?
I think so. Currencies have stabilized with the help of external deficit adjustment as well as due to adjustments in the domestic front (slower import growth and higher nominal and real rates). This has led to dollar denominated nominal GDP growth to recover strongly and to EPS growth to actually pass through to international investors. This is a strong tailwind behind EM equities. We are not yet seing strong earnings growth acceleration in reporting currency terms, but I don’t think it’s even necessary for decent equity returns at these valuation levels. But if we do get acceleration of earnings, that would be additional boost to equity prices.
If investors have to choose between emerging or frontier markets. Where should they invest?
How I see it is that division between Emerging and Frontier markets is slightly artificial. Mostly it has to do with liquidity and breadth of the market. I would recommend a strategy that utilizes investment opportunities across EM and frontier markets. There’s great rapidly developing markets like Vietnam and Pakistan who still belong to frontier markets by MSCI classification (although Pakistan is going to be upgraded to EM next year). But then there are a lot of opportunities, for example, in very broad Indian and South East Asian markets.
Which markets do you favor?
Currently we prefer countries which have strong domestic dynamics like Vietnam, India and Philippines. Also Indonesia looks interesting as the economy is recovering from downturn, although slowly.
Antti Raappana was speaking at the recent Nordic Investment Managers Forum, which took place in Luxembourg on 6 October. For further information click here: www.nimf.lu