Portfolio managers awaiting details of Donald Trump's anti-globalization crusade predict they'll be spending more time in coming years culling emerging markets winners from losers, but one industry veteran insists the opportunity in that market segment now remains a broad-based one.
Investors fixated now on “noise” regarding which elements of Mr. Trump's protectionist campaign rhetoric he'll translate into policy could miss out on the opportunity already on offer from the market consensus that the president is bad news for emerging markets, noted Robert Arnott, chairman of Newport Beach, Calif.-based Research Affiliates LLC, in an interview.
Political upheavals set the stage for great investment opportunities, and a combination of low equity and bond valuations and beaten down local currencies are serving one up in emerging markets, he said.
Given even a modest dose of mean reversion over the coming 10 years, Research Affiliates expects a market-cap-weighted MSCI Emerging Markets strategy to deliver annualized returns of 7.5%, he said.
Even after a 2016 gain of roughly 10% for that emerging markets strategy, its Shiller P/E — which smooths out earnings volatility by using a 10-year average for earnings — stands at just above 11, compared with a historic average of 17, so “there's still quite a bit of juice left in the orange,” said Mr. Arnott.
Grantham Mayo van Otterloo pegs annualized returns for emerging markets equities over the coming seven years at 6%, but GMO's figures are predicated on a full reversion to the mean, noted Mr. Arnott. Research Affiliates bases its forecasts on a 50% reversion to the mean, or a Shiller P/E of 14 at the end of 10 years.
Returns would be even stronger for a value-focused smart-beta emerging markets strategy that breaks the link between a stock's price and its weight in an index, such as the Research Affiliates Fundamental Index strategy, or RAFI, said Mr. Arnott.
Market veterans said the merits of Mr. Arnott's valuation-focused argument must be weighed against growing uncertainties, which will force investors to be choosier when picking emerging market stocks and bonds.