Investing in emerging markets : wasted effort or exciting opportunity?
By Cornel Bruhin, Portfolio Manager in the Team Emerging Markets/Corporate Debt
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Many emerging countries produce commodities. Brazil stands out here. It produces everything from metals to sugar, coffee, orange juice, fruit, soybeans, grains, precious metals and oil. It has excelled in each of these cycles. Not only have share prices multiplied, but the currency has also appreciated strongly. Between 2001 and 2011, the Brazilian real appreciated by 100% against the US dollar. The risk spreads of the bonds have narrowed considerably and Brazil has been upgraded from BB to BBB- by the rating agencies.
Yes, the last 12 years have been difficult for emerging market assets. Many investors have left because the volatility of the assets was too high and the bottom line performance was rather poor, especially compared to technology assets. Commodities have corrected strongly over this period. For this period, one can possibly speak of a wasted labour of love.
New value based currency
Emerging market assets are now at historically low valuations and now offer an exciting opportunity at all asset levels. Even in fixed income. Brazil raised interest rates very quickly from 3.5% to 13.75% in 2021. Inflation rates have fallen rapidly and were still at 3.1% in July. On 2 August, the central bank lowered the interest rate by 0.5% for the first time. Brazil offers the highest real yields. Growth was 1.9% in Q2 and rate cuts will stimulate growth. Equities are at historically low valuations and have huge potential. But many other emerging markets offer similar valuations and prospects.
We therefore believe that it is not only an exciting opportunity, but a "must" to invest more in emerging market assets, as many investors are underinvested. Of course, any increase in emerging market weighting will be gradual, suggesting a long accumulation phase.
On 22 August, the presidents of world’s major emerging markets met in South Africa to announce their own "value-based" currency. Rumours are that the new currency will be backed by gold. The move underlines the emerging countries' ambition to play a greater role in the world economy. In purchasing power terms, emerging markets already account for well over 50% of global value added.
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