Investors are wrongly apprehensive about adding to emerging markets due to concerns around the impact of high US interest rates.
Citywire + rated Harting, who currently has a 66.55% country allocation to the US, said, if interest rates rise, it’s due to an improvement in global growth and investors should not shy away from emerging markets due to rising rates.
‘Interest rates are rising in the US, it’s because global growth is improving, and so the demand for the goods produced in emerging markets is improving. We’re seeing it in the exports and the sales of these companies and countries.
‘When we look back to the mid-2000s when the Fed raised rates from 1% to 5.25%, emerging-market stocks were up 135%. They’re only 25% into that rally again, and I think there’s a lot more room to run.’
Harting said concerns surrounding protectionism in the US have been less impactful on the broad market than investors had first feared.
‘The obvious casualty has been Mexico so far, which last year suffered greatly because of concerns about relations with the US. But, as people look to other countries that have trade imbalances with the US, it becomes more complex.’
Harting uses the iPhone as an example of a product which would struggle to be produced in non- emerging market countries if proposed protectionist plans were implemented.
‘The iPhone is something that’s produced in a number of different Asian countries. Not because of low labour costs, but because of a very competitive cluster of businesses that cooperate together and produce a product that people want at a competitive price. We’ve never made an iPhone in the United States.
‘You can’t simply snap your fingers and say, ‘we must make those here.’ If you did, they would surely cost thousands of dollars, and Americans don’t want to pay that much. So it’s not so easy to just onshore products that were made offshore if they were made offshore for a reason other than low labour costs.’
However, Harting highlighted currency risk as a factor which all investors need to take into account when looking to allocate to emerging markets.
‘It accounts for about one-quarter of the volatility in a typical portfolio. We think it’s important to manage currency risk actively. It can be either a way to dampen volatility or a way to improve return, or at least the consistency of return.’
The AB Developed Markets Multi-Asset Income fund returned 8.45% in US dollar terms over the one year to the end of March 2017. This compares with a 13.72% rise by its Citywire-assigned benchmark, the LCI MSCI WI/BBG BC GI HY Hdge/Trs Hdge (50:40:10), over the same time period.