Advertisements

Emerging-markets rebound hasn’t convinced everyone

Emerging-markets rebound hasn’t convinced everyone

Last month investors sent $45B into emerging markets, the most money to developing countries in 20 months, despite Fed taper

By Trevor Hunnicutt   |  June 20, 2014 – 2:00 pm EST

Investors in May drove the most money into emerging markets in 20 months but at least one fund manager is waiting for more volatility before he’s completely bullish.

“A lot of people ran away from emerging markets, the values improved and they came back,” said David Rolley, who helps lead global-fixed-income strategy for Loomis Sayles & Co. “Volatility is at a record low [across stocks, bonds, commodities and currencies]. Investors get braver, particularly the one that have to borrow money.”

“I have to worry about a spread bear market in emerging markets,” Mr. Rolley said at the Morningstar Investor Conference in Chicago. He’s buying short-maturity bonds from more reliable emerging-markets firms to avoid duration risk but also earn spread, or a yield premium.

Investors put an estimated $44.7 billion into emerging-markets mutual funds and exchange-traded funds in May, raising the total over the last 11 months to $221.8 billion. May’s total was the most since September 2012, when the latest round of quantitative easing was first announced, according to the Institute of International Finance Inc., which released the data this week.

But the low volatility isn’t helping, according to Mr. Rolley. He said low volatility is reducing term premiums and spread premiums. He’s waiting for two triggers by the Federal Reserve that will increase volatility — the end of the bond-buying stimulus program and the increase, even small, of interest rates.

An announcement that the Fed planned to taper the stimulus roiled markets last June and emerging markets saw outflows of $32.5 billion, according to the IIF data. That was an opportunity for fund managers to seize on the volatility, Mr. Rolley said.

“Just talking about it gave us a more interesting entry level last year,” he said.

Another portfolio manager said some investors have overestimated the risks to emerging markets from the taper.

Justin M. Leverenz, director of emerging market equities for OppenheimerFunds, said he disagrees with an investment thesis called the “fragile five,” coined by Morgan Stanley, that suggests that Indonesia, South Africa, Brazil, Turkey and India are particularly threatened by tapering.

He said the developing world has fundamentally changed since the 1997 Asian financial crisis. In his view, countries such as Russia are slowly but surely making structural improvements while the developed world struggles with slow growth, unemployment and other economic problems.

Still, the overall economic picture of the countries is not synonymous with their potential as investment markets, Mr. Leverenz said.

“You can’t confuse macro growth with companies,” he said. “You need to invest in extraordinary companies and not get bothered about where they’re domiciled.”

 

Advertisements

About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: