Emerging Markets have had a pretty poor 2013 which has been in stark comparison to the performance of UK and US equities. A strong dollar, political instability and weak economic growth appear to have been te main causes of this performance. But what is in store for the year ahead?
Below is a comparison between the iShares developed market stocks ETF IWRD.L (in red) and the equivalent Emerging Market ETF IEEM.L (in blue). As you can see, over the last 12 months the Emerging Markets have under performed their Developed Markets significantly.
So is this trend set to continue or is this a great buying opportunity?
Political Instability
Not renowned for it’s political stability the Emerging Markets can be much more susceptible to political uncertainties than developed markets. With 2014 elections on the horizon for Turkey, India, Indonesia and Brazil there is a fair chance the markets could be affected. Out of these countries I can envisage close run elections or leadership changes in India, Ukraine and Turkey.
In India the congress party candidate has yet to be decided. High inflation, slow growth and lack of reforms seem to be creating an opportunity for the opposition who seem to have a strong leader in Narendra Modi. India to me is a potential powerhouse held back by the lack of economic reforms.
Meanwhile Turkey’s first elected President, Erdogran seems to be sinking ever deeper into his corruption scandal and a deep rooted struggle for power continues to unsettle the country. Once the former darlings of the Emerging Markets and an economic bridge between Europe and Asia, with the Lira continues to weaken and the inflation outlook doesn’t look good. The dream looks to be over, for now at least.
Over in the Ukraine there is yet another political crisis unfolding along side some pretty dire economic data. The fact that Russia effectively bailed out the country in December to enable it to meet it’s short term financing shows the depth of the economic situation.
Real Money Flows
According to the FT, outflows from EM equity funds rose to $6.3bn in the last week up to January 29th, making it a whopping $12.2bn in the month. That a hell of a lot of ward pressure on prices and signifies the biggest withdrawal of EM funds since mid 2011.
Outflows from both EM Equity and Debt funds have been continuing for several months now as non developed markets have been apparently left behind by the likes of the US and UK. Investors have been voting with their feet.
Success Stories
It’s not all doom and gloom. Mexico’s recent reforms of it’s energy sector should encourage investment and help to fuel further growth, particularly if the recovery in the US continues.
Let’s not forget the Middle East in all this talk. With Iran seemingly willing to back down on it’s nuclear ambitions and increase it’s dialogue with the US Iran could emerge as an economic success story if a progressive set of reforms bring about real change.
China
As reforms are put in place I get the sense that the Chinese government are finally realizing that the growth party wasn’t going to go on forever. I can see China’s growth rate increasing steadily this year as reforms start to pay off.
Certainly as Europe, the US and EM economies continue to recover China should feel some benefit in terms of increased exports. While I think in the short term China should produce good returns the big elephant in the room from my perspective is that one day we’ll see China’s credit bubble pop in a truly spectacular way.
The Outlook
If you pile in to EM today you’ll certainly be going against the herd which is usually not a bad direction to head in!
I think that in general sense Emerging Markets present some scope for opportunities in 2014 as Ermine and Monevator have suggested. However personally I think the broad trackers have got further to fall and that in order to maximize any potential benefit now, a more selective approach is needed than the simple iShares IEEM.L ETF mentioned above.
Personally I’ll be looking to add some more EM exposure to the Money Tree this year however I can’t for the life of me figure out exactly how best to do that yet. I’ll most likely dip into a few more regionally focused ETFs and resist the urge to put some FX plays.
Watch this space…
I prefer investment trusts for emerging markets. Usually on a discount to NAV and ETFs are usually heavily overweighted in commodities. Trustnet is a good site which lists all emerging market ITs. JP morgan have quite a few.
Over the long term, Dr Mobius seems to have outperformed his index, therefore earning his fees. I expect to add to my TEM holding this year.
Plus AAS, AAIF….