Look, it may not have been the only time, but such visits certainly aren’t that frequent. And the Emerging Markets guru did stand out in his off-white suit and encircled by his entourage. At least he made it to the city centre – one of his analysts spent his Dublin visit in the private jet on the tarmac at Dublin Airport as some visa issues arose.
So anyhow Dr Mobius addressed a small gathering in the Conrad hotel, no notes, and from what I recall no Powerpoint. It was a tour de force performance on Emerging market investing with depth, breadth, enthusiasm and story-telling. And then straight back to the airport, and the jet, and the analyst.
I was reminded of the visit this week, as several asset managers have tipped Emerging Markets as the place to be in 2019. I spoke with one manager who is very positive on EM bonds and I note that Morgan Stanley have gone bullish on EM equities, moving from underweight to overweight.
Are they right?
EM assets certainly appear cheaper than they were 12 months ago! Global EM stocks are down 13% so far this year compared to 5% for stocks overall
Investors will have to form their own view, but there are a number of issues worth bearing in mind in coming to, or implementing a view.
Valuation: most strategists look at Price to Book as a default valuation metric and yes – P/B is somewhat below the 20 year average. But that average contains a period (2006 -2008) when we know valuations were daft, which elevates the longer term figure and flatters the current reading.
Experience counts. EM does dance to a different rhythm and I value managers who have managed successfully over several market cycles. Conventional desk top research has greater limitations, in my view, in an EM context. Anthony Bolton, the highly successful Fidelity fund manager, found the investing environment quiet different when looking to transfer his own investing skills and process, which worked well in Europe, to China.
Open or closed. Once you’ve made your decision the issue then becomes how to access the opportunity. While there is a wide range of open ended funds investing in Emerging Markets, it can be worthwhile researching closed ended funds as well. They are not bashed around by inflows or outflows and can stray away from the high liquidity large caps that everyone tends to own. When I’ve compared investment trusts and open-ended funds run by the same manager, the trust usually performs better.
Big picture. I think currently, more than ever, global factors are playing a role in the progress of EM. The two most significant factors currently are the US dollar, and the health of the Chinese economy. A strong dollar has put emerging economies under pressure due to capital flow impacts and debt servicing costs. In periods of dollar strength in 2018 we have seen EM sell off. A lull in the rate of growth in China has also played into EM weakness. What would work well for EM in 2019? A sense that the US Federal Reserve was close to the end of its rate cycle and would pause, and also if markets are convinced that the current pro-growth policies in China will prevail and outweigh any negative trade war impacts, would be very supportive of EM as an asset class. If you think the US dollar strengthens further and China stalls, it would be hard to square with a positive EM view.
Don’t buy the label. There is quite a degree of differentiation within that EM category. Turkey and Argentina’s experience in 2018 was quite different from many of the other constituents of the EM universe. EM economies overall may be in better shape than in previous downturns (better balance of payments etc) but there are still outliers. I believe that this argues for an active approach at regional, country and stock level. If you have a risk budget to spend, I believe you will see a better return from it here, rather than, say, in large cap US equities.
I do think there is opportunity here and now.
And who knows we might get Mark Mobius back in Dublin…….
Tradewinds 