According to a T Rowe Price report entitled Emerging Markets and the need to go beyond the BRICS, investors need to look at emerging markets (EMs) selectively in order to capture the best value.
“The volatility of recent years is indicative of real change in the emerging world that requires understanding,” said T Rowe Price global equity fund portfolio manager, Scott Berg.
“With the fundamental and structural changes happening within the EM world, investors should embrace the view that the EM thesis has evolved,” he said.
According to Mr Berg, the BRICs – Brazil, Russia, India and China – have underperformed, reinforcing the need for investors to think more selectively and allocate equity beyond that group of markets.
“More non-BRIC nations have delivered to a greater degree on the promise of the EM thesis put forth a decade ago — that economic growth, fuelled by domestic factors such as favourable demographics and consumption growth, would lead to superior corporate profitability, which would drive superior returns for investors,” he said.
The change in the commodity cycle is another trend that illustrates why investors should adopt a country-specific investment strategy.
“If [the commodity cycle is] maintained, this will herald a new era for many EM economies, creating both positive and negative drivers on a country-specific basis.”
Investing in emerging markets has reached the point where investing “surpasses the simplicity of the badges that seek to define (or confine) the collective group of stocks,” Mr Berg said.
“The BRIC markets have fundamentally changed over the past decade with the positive change thesis playing out very unevenly. Therefore, there is a need for adjustment as we move forward,” he said.
Mr Berg pointed to the collapse of Brazilian and Russian equity markets, in contrast to the growth potential of India, to elucidate the importance of embracing a country-specific investment strategy.
“We would stress that there is a very strong case for selectivity within investing,” said Mr Berg.
“We believe we will see an uneven world going forward, with less correlation and more dispersion of returns across countries, sectors and stocks.
“While it is a more complex environment, this should provide more opportunities for thoughtful investors to take advantage of valuation anomalies and temporary crises of confidence that [are a] part of investing,” he said.
