Emerging markets should be renamed diverging markets, as they are increasingly uncorrelated. From 2003 to 2008 Asian, Eastern European and South American indices moved almost as one – climbing upwards thanks to strong export markets and rising commodity prices.
But following the global recession the drivers of this bull market have come undone, prompting Baillie Gifford fund manager Roderick Snell to award them the new moniker of diverging markets.
“Those economies that were over reliant on the commodity price boom are now fragile,” he said. “Emerging markets with a strong manufacturing base were too dependent on exports and developed markets.”
In 2001, Goldman Sachs chairman Jim O’Neill coined the term BRIC – an acronym for Brazil, Russia, India and China. In a paper entitled Building Better Global Economic BRICs O’Neill predicted that those four nations would overtake the world’s richest economies and that the G7 would have to be “adjusted to incorporate BRIC representatives”.
All four nations have experienced periods of economic and stock market success since the paper was published, but with varying degrees of consistency. In recent years, these inconsistencies have widened.
Of the four, China can be heralded the most successful. But the years of double digit GDP growth are behind the great dragon economy – official statistics put forecast growth for 2014 at 7.5%, although broader indicators suggest this figure is lower in reality.
Coalition governments, political posturing and inefficiencies within the public sector stalled India’s development – which has only just received a kick start in 2014 thanks to new Prime Minister Narendra Modi.
Reforms to open up Russia to international investment and business deals did the economy some good – before sanctions following military intervention in Ukraine stifled any progress.
Brazil is in a similar stalemate. Following recent general elections BlackRock Latin America fund manager Will Landers said that he won’t be making an investment decisions until a new finance minister is appointed.
“The election did not go the way we were hoping. The fundamentals of the Brazilian economy are weak, so we are on hold for now. We need to wait and see who the new finance minister is – and what their fiscal policies will be,” he said.
It is not all bad news however; there are certain nations that offer emerging market investors plenty of opportunities. Growth in both the Asia Pacific and Emerging Markets regions is forecast to be higher in 2015 with latest International Monetary Fund forecasts showing the ASEAN-5 growing by 5.4%, up from 4.7% this year, India by 6.4% compared to 5.6%, and Emerging Markets overall advancing by 5.0% following 4.4% in 2014.
“As ever, given the wide range of countries included in Emerging Markets, some are doing well, others badly, and others middling,” said Morningstar’s investment strategist Andy Brunner. “The decline in oil prices will be a boon for some but obviously highly damaging for net-oil exporting countries. If current oil prices are sustained the Russian economy, for example, could well contract in 2015.”
Landers sees opportunities in Mexican industrial companies if much needed reforms are given the go ahead – and he will have cash ready to invest in Brazil once the political landscape is clearer.
In Asia, Baillie Gifford’s Snell says there are plenty of opportunities – especially in more niche sectors such as technology, e-commerce and innovation.
“North Asia has led the way in these sectors, and the rest of the region will follow. These countries have been early adopters of technology – 4G in Taiwan, bypassing fixed line internet in India, e-commerce in China – and it is these innovators that present the best investment opportunities,” he said.
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