There once was a time when most equities from emerging markets simultaneously went up and down, respectively, often driven by the development in oil, metal, and other commodities.
Today, returns have become highly differentiated – even within a single market.
This was one of Swedish frontier markets investor East Capital’s messages last week when the company held a webinar entitled"Outlook for sustainable emerging markets investments in uncertain times" at the webinar equivalent of YouTube, BrightTalk.
As an example, the total year-to-date return of the top 10 Chinese benchmark names varied between China Merchants Bank’s 35.6 percent return and technology firm Baidu’s negative return of 33.9 percent.
Both returns are in USD.
According to East Capital Partner and Deputy CIO Jacob Grapengiesser, there are two drivers for the major divergence between appreciating and depreciating stocks. One is a dramatic change in sector composition as the importance of commodities has declined while the technology sector has surged.
"Tech is often domestically focused and not as volatile as commodities," he said in the webinar.
Another reason for the increased complexity of investing in emerging markets is that the markets are less homogeneous than they were earlier. Additionally, several emerging markets have grown to see much larger flows from domestic investors.
No crash ahead
East Capital Advisor and former Swedish Finance Minister Anders Borg delivered another key point during the webinar, arguing that the current slowdown in global economy will not lead to a crash in markets.
"Everybody expects a slowdown in global economy," he said. "The structural growth in emerging markets is stronger than in developed markets and we shouldn't be afraid of some political uncertainty," Borg argued, referring to the trade war between the US and China, tensions in Hongkong, and Brexit.
Fundamentally, when investors look at emerging markets, the imbalances that we saw when the Russian financial crisis hit in 1998 and the Asian financial crisis in 1997 are nowhere to be found.
"But several less important markets, such as Turkey and Argentina, are facing macroeconomic headwind."
A key risk for emerging markets is a sudden and unexpected depreciation of the Chinese currency RMB.
"But China will keep it natural as the underlying export sector is currently very strong. Oil prices and a potential collapse remain the big questions," Borg said.
Given stability in the oil price going forward, the former Minister of Finance later argued that Central Eastern Europe and Russia are emerging markets with a decent investment potential.
Russia, the Baltics, Poland, and Slovakia deliver decent growth numbers and offer a strong fiscal framework and acceptable public debt, he argued.