Have emerging markets bottomed out? Emerging economies have yet to report the impact from higher rates and currency falls, which could prompt a further loss of investor confidence and fuel a feedback loop

August 30, 2013 Leave a comment

August 29, 2013 6:53 pm

Have emerging markets bottomed out?

By James Mackintosh

Impact from higher rates and currency falls yet to be reported

There’s an easy way to spot a true deep-value investment. It’s the position you would be embarrassed to present to the investment committee, and definitely would not recommend to a friend. Ideally, clicking to confirm the purchase should make you feel physically sick. Emerging markets (EM) are not one of those screaming bargains. Still, on Thursday they rallied strongly as government intervention in India and a rate rise in Indonesia prompted short-covering in the rupee and rupiah. Both jumped more than 3 per cent, the biggest rise in the rupee in a decade. The question is whether EM have now bottomed out. The recent speed of the fall in the rupee certainly suggests fear. Yet, investors remain ready to search for good value. Serious panic has not set in, and falls in equities, currencies or bonds, while big, are much smaller than in proper crises. EM equities have not even had a one-fifth fall from their peak this year. In dollar terms they are off 16 per cent; in local currency shares are down less than a tenth. But in relative terms EM shares look a steal. They have lagged behind developed market shares in the past three years in a way reminiscent of the aftermath of Lehman’s collapse, the 1997 Asian crisis or the reaction to the 1994 US rate hikes. The valuation discount to developed markets has not been as big since 2005 (on price to book value) or 2006 (for price to forward earnings). EM governments’ willingness to use up currency reserves might support the growing voices suggesting that now is the time to buy. But emerging economies have yet to report the impact from higher rates and currency falls, which could prompt a further loss of investor confidence and fuel a feedback loop. A pause in the selling would give EMs a chance to show they can fix entrenched economic problems. Without that, bulls can only hope global recovery gives EM economies a lift – or watch them become a true value play.

Filed under Macro Trends

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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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