Emerging Markets: A Career-Killing Sequel?


A Career-Killing Sequel?


Emerging markets stocks were on a tear—until they stopped. This year has been the Hudson Hawk to what had been akin to the Die Hard franchise. The good news is that stocks are looking cheap; the bad is that they could still get cheaper.

After the blockbuster success of the Die Hard franchise, moviegoers thought they knew what they were getting from a new Bruce Willis flick: action, adventure and a wisecracking hero. In 1991, however, they got Hudson Hawk, a movie about a show-tune singing cat burglar robbing the Vatican. The film bombed. Investors in the emerging markets can relate. For years, they’ve bought into the narrative that the developing world’s faster economic growth, improving credit quality, and increased stability would lead to supersized returns. And for a while, they did. Emerging markets stocks rose 12% annually for the ten years ended Dec. 31, 2012.But this year hasn’t lived up to its legacy. Instead, economic growth has been disappointing. The U.S. credit-rating firms, meanwhile, have warned of downgrades for the likes of Brazil and South Africa, among others. And that increased stability? It’s been replaced by massive protests in places such as Turkey, Brazil and Chile, and by a military coup in Egypt. Together, these events serve as a reminder as to why they’re called emerging markets in the first place.

But, after falling 12.5% this year, emerging markets do have one thing going for them—valuation. The MSCI Emerging Markets Index, for instance, now trades at 1.5 times its book value, or some 20% less than developed-market stocks, according to Credit Suisse, even cheaper than at the markets trough in 2008. “That gives you some sense of the pessimism that’s priced in,” says Credit Suisse strategist Robert Griffiths.

Still, they can always get cheaper: During the early 2000s, the MSCI Emerging Markets Index traded at a 45% discount to developed world stocks.

WHETHER THEY’RE WORTH THE RISK likely depends on your outlook toward China and its problems. Its economic activity—as measured by both the official and HSBC’s purchasing managers’ indexes—has slowed, economists have reduced their forecasts for economic growth and the People’s Bank of China allowed interest short-term lending rates to skyrocket in order to wean its shadow banking system off cheap credit. But will it become a full blown crisis?

Some investors expect China to be able handle its problems. Brian Singer, portfolio manager of the William Blair Macro Allocation Fund, notes that its growth, even if slower than expected, is still faster than most of the rest of the world’s, and its policy makers have more flexibility to navigate the slowdown. “The reality will be difficult but not as difficult as is priced into assets,” Singer says.

Others are more worried about the situation in the world’s second largest economy. “China feeds into the rest of the emerging markets,” says Jurrien Timmer, portfolio manager of the Fidelity Global Strategies fund. “And the China thing is not going to end soon.” He has a smaller-than-benchmark 3.2% position in emerging-markets as a result.

Yet whichever way you go, it’s time to set past expectations aside. Emerging markets might outperform developed ones in five years, they might not. But buying into the old story? That’s just setting an investor up for disappointment.

“Emerging markets have become this thing—are you in or out?” says Mark Weber, portfolio manager of the Scout Emerging Markets fund. “It’s just a bunch of companies, some of which are good, some of which aren’t.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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