Often when people speak about emerging markets investing, they take you on a tour of the world to discuss macro issues: “Will there be a soft or hard landing in China? Will Brazil emerge from recession in the second half of next year? Will sanctions on Russia be lifted or not?” My response is that this might make for extremely interesting conversation, but it's totally irrelevant to managing an emerging markets equity strategy.
It can even be counterproductive. For instance, look at China. The economy grew by nearly 10% per year over the past 15 years, but the markets returned -7% on average. By comparison, in South Africa the economy averaged 3% growth per year, but the market returned 86%. So the correlation between economic growth and market returns is just not there. Had you invested on this basis, you would have underperformed massively.
Even when people agree that gross domestic product growth doesn't matter, they continue to believe that simply being in a particular market does. That just isn't true. If you look at a market-leading retailer in Russia, it has outperformed not only the Russian market, which is a serial disappointer, but emerging markets more broadly.
Successful investing is all about investing in companies.
Forget the macrotourism and forget the markets. Our analysis shows that after three years, the performance of a stock is closely related to the performance of a company's earnings. So provided you didn't overpay first, you should see investment growth commensurate with the company's net earnings growth, independently of the country, independently of the market.
In fact, if we decompose returns by sector, country and company specifics, the research we have undertaken shows that around 50% to 70% of returns come from the company itself. So when we speak about the strategy of emerging markets investing, we do not talk about where we are invested in terms of geography or industry, but instead which companies we have invested in and why.