Investors and money managers are re-evaluating their emerging markets positions and sentiments but are still searching for opportunities, despite disappointing returns this year.
A number of emerging market countries have been through serious adjustments this year, including Argentina and Turkey, said managers. Election results, changes in market sentiment and large debt issuance by some countries have led to re-evaluation of positions on certain countries.
"Early year investor exuberance led consensus emerging markets earnings expectations to be pushed to around 18% for calendar year 2018," said Edward Evans, emerging market equities portfolio manager at Ashmore Group PLC in London. "However, expectations have since moderated and been revised down to around 12% for this year and 2019. Both seem achievable," he said.
And despite increasingly difficult conditions for emerging markets, against a backdrop of continued U.S. dollar strength and rising interest rates, and worsening sentiment, managers are urging investors to stick with their equity and debt strategies.
"Emerging markets have corrected significantly since the beginning of the year for several reasons," said Karine Hirn, Hong Kong-based partner and senior adviser at emerging and frontier markets specialist East Capital International AB. The firm has €2.8 billion ($3.2 billion) in assets under management. She cited tightening monetary conditions, U.S. dollar and market strength, stronger oil prices for the first part of 2018 and "an overall increased level of geopolitical risks very much driven by the U.S. administration but also Brexit and Italy."
While these factors are external, internal developments have played negatively on markets, she said, citing Turkey and Argentina's political and economic problems earlier in the year, political and economic difficulties in South Africa, and China's deleveraging process. She said the external factors, however, have been the more important drivers.
"All that said, the correction has created very attractive valuation levels, especially when comparing (emerging markets) with the U.S. valuations, which are close to all-time-high levels," Ms. Hirn said.
In absolute terms, Mr. Evans said that emerging markets are "attractively valued, trading around 10.1 times. They trade at a notably lower multiple than the S&P 500 (index), which trades around 15.2 times." Emerging markets specialist Ashmore runs $76.4 billion in assets.
And Ken Adams, head of tactical asset allocation at Aberdeen Standard Investments in London, said the firm's assessments of different markets — which it scores on a scale of -3 to +3 considering forward market drivers, monetary environment and behavioral environment — actually show asset classes within emerging markets to be attractive.
"Although markets have fallen, and emerging markets in particular have underperformed, EM debt, EM equities and EM hard currency debt … are all markets that appear in the top five or 10" according to the firm's scores.
"When we look at these drivers and take an average, the score for EMD local currency is +1.7 — that's our strongest positive view right now. It's not exactly 'this is a fantastic opportunity,' but a decent return from where we are today," Mr. Adams said.
Emerging markets equities carries a +1.6 score — not "let's fill our boots" but there is some value there, he said.
However, Mr. Adams noted investor sentiment is "pretty negative on emerging markets assets generally."