Knee-jerk pessimism in emerging markets may lead investors to underestimate what has become a compelling investment universe, according to Carmignac’s Didier Saint-Georges.
'Today is definitely the wrong time for investors to turn away from the emerging market space,' he told Citywire Selector.
The firm currently has 16.8% of its €60 billion assets under management in emerging markets stocks and bonds, and Saint-Georges highlighted the progress the sector has made over the past four decades.
'According to a recent analysis by Bank of America Merrill Lynch, in the six major bull markets over the past four decades, EM stocks have on average risen to three times the level of developed world equities. And those bull runs, the analysts have found, lasted an average of three to four years.'
At a granular level, the firm currently has 9.13% of assets in its flagship Patrimoine fund in emerging markets.
Saint-Georges said investors need to sit up and take notice of the developing world, especially at a time when it is beginning to recover from five years of lagging other economies.
‘Speculation about the underlying technical issues always sparks a good deal of lively, yet inconclusive, debate. Judgments vary widely on points like market valuations, the risk of a pronounced hike in US interest rates and the prospects for dollar appreciation.’
‘In contrast, fundamental analysis suggests that the emerging economies are at last making their way out of the doghouse in which global investors have confined them since late 2010.’
Checking on China
Within its EM exposure, the firm also has 2.3% of assets in China and Saint-Georges said the country offers tremendous opportunities for investors to capture strong lasting growth.
‘While many pundits are focusing on the recently held 19th Communist Party Congress, which served to anchor the policies of the Xi Jinping era, the relevant news for investors lies elsewhere. What matters from their standpoint is that the economic reform process is continuing.
‘A lot of state-owned enterprises – the core of China’s old economy – which suffer from huge overcapacity and excessive leverage, are now restructuring. Some have been shuttered; others are drastically scaling back production capacity.’
This, according to Saint-Georges, will result in higher profit margins and lighter debt loads. However, he said such manufacturers are not the best investment option.
'Essential reforms typically cause considerable pain at first, as the experience of Argentina makes strikingly clear,' he said.
'It is only now, two years after President Mauricio Macri was elected and undertook such crucial reforms, such as scrapping ineffective subsidies that the Argentine economy is beginning to pick up steam.
'In China, the chief benefit of an improved outlook for the old economy is to reduce systemic risk and gradually lessen the country’s excessive debt burden, which many view as a veritable time-bomb.'