The debt load of most emerging economies is the single biggest risk facing investors and also one of the most overlooked dangers at present, according to Comgest’s emerging markets team.
In an investment update, the team – which comprises Wojciech Stanislawski, Emil Wolter, Charles Biderman and David Raper – said they would caution against becoming too positive on the developing world.
Speaking specifically about the $6.14 billion Comgest Growth Emerging Markets fund, the quartet said: ‘From a global perspective, the debt load of most economies remains the biggest single systemic risk.
‘This is certainly underappreciated by investors who have grown used to low interest rates. Markets have increasingly become complacent, as illustrated by the depressed levels of the VIX volatility index and other confidence indicators.’
The four managers added that ‘very serious questions’ remain over the emerging world, notably within China. ‘Debt has been fuelling Chinese growth since 2008 and there are limits to how much more liquidity can be injected into the economy.
‘Slower growth in China would have a negative impact on the overall emerging market recovery. A potentially weaker China would further weaken the commodity complex, triggering renewed US dollar strength and emerging currency weakness.'
The Comgest team said more aggressive than expected interest rate rises could spur US dollar appreciation, which would be cause for alarm.
‘Domestic demand in most emerging countries excluding China remains weak. Without a broader economic recovery fuelled by the stronger participation of consumers, it is hard to expect any further improvement in corporate earnings.’
The managers added that, despite strong returns over the past year, important challenges remain. ‘In this context, a reasonably valued portfolio of solid, quality companies represents the most preferred way of participating in the emerging markets rebound.’
The Comgest Growth Emerging Markets USD Acc returned 8.6% against a 4.4% rise by the MSCI EM (Emerging Markets) TR USD over the three years to the end of June 2017. Both returns measured in USD.