Expert sees emerging markets bouncing back
With markets around the world taking a dive on Wednesday, it appeared to be an inauspicious day to be talking up investment opportunities.
But at LOM’s lunch meeting to discuss emerging markets, the focus was on developments later this year — and further out to four or five years’ time — rather than the plunging indices of the moment.
There has been some panicky reaction to free-falling oil prices and exchanges sliding lower, with some entering bear markets.
That was the view of special guest speaker Erik Nelson, head of international sales for FMG. It was a view shared by Bryan Dooley, of Bermuda’s LOM Group.
Mr Nelson said: “We think there has been a total overreaction in the markets and things will pick up in 2016.”
He gave a presentation on emerging markets with a particular focus on the FMG portfolio of funds focused on those economies. And he urged the audience of investors at the lunch, held in the Hamilton Princess, to look at the potential of emerging markets in the mid to long term.
“Emerging markets have had a tough last five years, but now we are seeing green shoots. We are expecting to see good things now. We had a big sell-off in 2015. This is the turnaround year when things will get better,” he said.
One of the fundamentals he used to make his case was the attractiveness of price-to-earnings (P/E) data for emerging markets when compared to the S&P 500.
Highlighting Russia, Mr Nelson said the country’s economy had been beaten down by a combination of international sanctions linked to the Crimea dispute, coupled with the oil price collapse. The country is a major exporter of oil and has the world’s largest reserves of natural gas.
Russia’s giant energy company Gazprom has been trading at a low P/E ratio for a number of years, touching 3.5 at one point and currently hovering around ten.
“When sanctions are lifted it will rebound,” said Mr Nelson, who was upbeat on the prospects for investing in Russia.
“We are going to see a large recovery, it is just of matter of when. Either oil picks up or sanctions are lifted. It is a liquid market to get in and out of.”
Turning to India, for which FMG has a dedicated country fund, Mr Nelson said: “India is the safest play if you are going into a big emerging market.”
He explained that Prime Minister Narendra Modi is pushing for foreign investment, and that the country had economically favourable demographics with half its population of 1.2 billion below the age of 25.
“They are catching up. India will hugely benefit from low oil prices as they are a net importer of oil.”
Regarding the economic and market turbulence that has made China a leading news story for much of the past 12 months, Mr Nelson said: “China is extremely volatile. It is the second biggest stock market in the world and had twice the turnover of the New York Stock Exchange last year.”
He said FMG, which is a specialist in emerging market investments, believes China’s falling stock market has bottomed out, and that there is now a lot of upside opportunity for investors.
“Any time the CSI is below 3,000, the government pushes in money,” he said, referring to the CSI 300 index.
“China is continuing to drop interest rates. They are going from an export-driven to a consumer-driven economy.”
His company has a combination fund that features stocks from the big three emerging markets of China, Russia and India. The fund’s allocations are adjusted to match prevailing opportunities.
Mr Nelson said FMG was continuing to be “very defensive” on Russia and India, but expected to be less so during the coming months.
Looking at some of the smaller emerging markets, he highlighted the Mekong Fund, which seeks opportunities in “the last frontier of Asia”. The fund has seen high growth for the last few years, in 2013 it was up 11 per cent, in 2014 it rose 15 per cent and last year it improved by 8 per cent.
Myanmar, Thailand, Cambodia, Yunnan China, Laos and Vietnam are countries featured in the fund.
The lunch event included LOM’s market outlook and fund performance and the launch of LOM’s emerging markets fund.
Mr Dooley, general manager, LOM Asset Management, said the company still sees the global economy growing, even though at a slowing rate.
“Monetary stimulus remains strong in Europe; China is cutting interest rates, while the US has gone a little in the opposite direction,” he said.
He explained that while the dollar’s strength last year had been a headache for multinationals, undercutting profits, it would become a neutral factor beyond this year’s first-quarter results.
Markets were flat or down in 2015, and had suffered “a rough start to this year with the markets down by an average of 8 per cent”, said Mr Dooley, who spoke of a support level around 1,800 for the S&P 500, and said that, in the midst of the markets’ turmoil, there is a feeling that an inflection point is approaching.
He added: “If you want to bank on anything, it is volatility.”
Mr Dooley said investors should be well diversified, with a stake in equities, bonds and preferred shares.
In its outlook, LOM sees the commodity rout having a ripple effect in emerging markets, the Federal Reserve going slow with rate hikes and volatility becoming the new norm.
Mr Dooley added: “We see relative value of Europe and Japan markets being enticing. We are in the process of looking beyond the US.”
And he agreed with Mr Nelson on the positive outlook for emerging markets in the coming years, with a large part of that due to the generally younger populations buying houses and taking out credit. He noted that demand for healthcare in the emerging market countries was growing at 10 per cent, while e-commerce in places such as China was outstripping the US.
For 2016, LOM’s strategies include increasing its exposure to non-US markets, and favouring corporate debt over government debt.
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