Emerging markets equity returns have taken a roller-coaster ride the past five years, and most experts can't offer much hope for a smoother 2012 thanks in part to the unresolved eurozone crisis.
The MSCI Emerging Markets-ND index fell 18.4% in 2011. That follows jumps of 18.9% and 78.5% in 2010 and 2009, respectively, a drop of 53.3% in 2008, and a rise of 39.4% in 2007.
“It's certainly clear growth has slowed across many emerging markets. The big wild card ... is just how much the European debt and banking crisis resolves itself,” said Joe Davis, principal and head of the investment strategy group at Vanguard Group Inc., Malvern, Pa. “Emerging markets performance will largely rest on how the European situation plays out.”
Continued bad news out of Europe would bring with it the return of volatility, and would likely suppress performance from emerging markets equity in 2012, experts say. But they add that the fundamentals are improving for these stocks, and corrected valuations have created some buying opportunities.
“The eurozone crisis will continue to overshadow markets in (early) 2012,” warned Debbie Clarke, principal and head of investment consultant Mercer's equity manager research boutique in London. “It's hard to see that will actually change. Having said that, we're hoping for some (resolution).”
A resolution would send all markets soaring, experts said, but few as high as emerging markets equity. Martial Godet, London-based head of emerging markets equities at BNP Paribas Asset Management called the possibility of a resolution a “game changer,” but added: “We aren't betting on that.”
Emerging markets aren't alone; Europe's problems will continue to haunt all worldwide markets until there's a resolution (Pensions & Investments, Dec. 26).
But Europe's effects on emerging markets aren't limited to market disturbances. The crisis is “important at two levels. Obviously it's the biggest risk globally to markets,” said Tapan Datta, principal, global asset allocation, at investment consultant Aon Hewitt in London. The other level is “how big the European (economic) impact is on emerging markets exports.”
Experts cite other factors, such as slowing global growth — especially in China, and inflation — and how government officials deal with it, as keys to emerging markets equity returns in 2012.
“Chinese growth is a very large variable here, particularly for commodity-driven economies in the BRIC complex,” said Maria “Masha” Gordon, executive vice president and lead portfolio manager in emerging markets equity at Pacific Investment Management Co. LLC in London.
Growth in China is a major driver of commodity prices, which in turn affect economic growth in commodity-exporting emerging markets such as Brazil and Russia.
Chinese officials put the pedal to the metal in its stimulus response to the global financial crisis in 2008. That seemed appropriate at the time, but “what was a bit less well-managed was the exit strategy,” Mr. Godet said. “It was a bit too slow and too late.”
The stimulus package created “a huge amount of economic activity,” said Jeff Munroe, London-based investment leader, global equities, at Newton Group. “That's going to be difficult to sustain. There will be a shakeout, which is unusual for China,” which has experienced 17 years of continuous growth.
“It's amazing how the investor world went from being incredibly positive about China last year to being incredibly negative about it now,” Mr. Munroe said.
James T. Swanson, investment officer and chief investment strategist at MFS Investment Management Inc., Boston, said emerging markets are “going into a mild recession ... the slowdown of the emerging markets economies is still upon us; we haven't seen the end of it.”
Experts stress that what's slowed are exports from emerging markets and that domestic demand within those countries is still robust.
Mr. Munroe said Europe is “clearly” weakening economically, “but the more important aspect for the emerging world is their domestic situation. European (problems) have been largely priced in.”
Newton is focusing its emerging markets equity investments on developed-market-based multinationals that do business in emerging markets. The firm likes food retailer Yum! Brands and banking services provider Standard Chartered PLC.