The Emerging Markets sector has recently paused for thought, with performance over the last twelve months struggling to compete with the average investment company's performance.
However, the long-term track record for the region remains impressive, with the Global Emerging Markets investment company sector up an impressive 333% over ten years in share price total return terms. This compares with the average investment company, up 177% over the same period.
Related sectors, such as Asia Pacific: Excluding Japan, have a similar story to tell. The average company in this sector is up 229% over ten years, with a number achieving returns even higher (see below).
With many of these companies currently on a discount, is now a good time to take advantage and invest for the long-term? What do Emerging Markets and Asia Pacific investment company managers think?
'A full blown crisis is unlikely'
Richard Titherington, Manager of JPMorgan Global Emerging Markets Income Trust, said: "History doesn't repeat, but it often rhymes. Most of the senior policymakers in emerging markets today lived through the crisis of the 1990s and they won't repeat those mistakes. While emerging markets might underperform for a while, a full-blown crisis is unlikely, and even if we do go into some kind of crisis, when markets plunge, it's a buying opportunity for long-term investors.
"As income investors, dividends are a key focus for us. Emerging markets dividend growth is better than that of developed markets, and if you are a long-term investor, the difference between 5% compound and 10% compound over 10 years is remarkable. In addition, dividends are a good measure of corporate governance: you can't exaggerate a dividend."
A seasonally strong Q4
Dr. Slim Feriani, CIO of Advance Emerging Capital and Manager of Advance Developing Markets Fund, said: "As we enter the final months of the year a constructive case can be made for the near-term outlook for emerging markets. If history is anything to go by the final quarter is traditionally a good one. Only once in the last ten years has the emerging markets index declined in the fourth quarter and that was in the depths of the financial crisis in 2008. Comfort can also be taken from the continuation of accommodative monetary policy in the West for longer than expected, attractive valuations, sentiment towards the asset class being at a nadir and stronger economic data from China, the most important economy in the asset class.
"A legitimate source of concern is the absence of a recovery in corporate earnings. Emerging markets have endured an unprecedented 30 consecutive months of downward earnings revisions. However, we believe that valuations now reflect a more modest earnings outlook with the asset class as a whole trading on a multiple of 10.4 times next year's consensus earnings per share, a level that has historically proven to be an attractive entry point.
"Emerging markets are unquestionably going through a transition, from a period of high expectations to one of more measured ones, but with attractive equity valuations, weaker currencies and negative sentiment everywhere we look, we are encouraged to believe that better is to come from the seasonally strong fourth quarter and beyond."
Remaining optimistic on Asia
Andrew Gillan, manager of Edinburgh Dragon Investment Trust, said: "Asia has seen some weakness this year, particularly some of the economies like India and Indonesia which have deficits to tackle and saw quite sharp currency weakness. The better news is that corporate profit growth remains positive in Asia, balance sheets are pretty strong and with a few exceptions, inflationary pressures have also eased. So we remain optimistic on the region and still see some of the key near-term risks as external. Valuations are a bit mixed but our current 14x Price/earnings ratio for the portfolio is comfortably in the middle of the range that the region has traded in the last decade."
'Huge room for development in emerging markets'
Richard Titherington, Manager of JPMorgan Global Emerging Markets Income Trust, said: "There is still huge room for development in emerging markets. In India, for instance, there are only 25 cars per 1,000 people versus 815 per 1,000 in the US. When people get money they buy cars, and we are confident that the pattern of increasing car ownership in emerging markets will increase. Of course there is a problem with that – already traffic and smog are bringing Chinese cities to a standstill, although the rate of car ownership is low. But if you look at London, 50 years ago smog regularly brought London to a standstill, yet today we have far more cars on the road and smog is a thing of the past. China will change and automobile penetration will increase."
Share price total return on £100 lump sum
(click chart to enlarge)
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