Aberdeen senior investment manager Bruce Stout said there is a strong dichotomy arising between the perception of risk that markets take and the reality of fundamentals that generate dividends and earnings in companies.
Mr Stout said when it comes to investing in emerging markets, investors become sentimental and emotional rather than paying attention to fundamentals, and this impacts investment performance.
“The reputation for somewhere like Mexico is that ‘it’s Mexico’, but when you actually look at the numbers and how it’s improved over the last few years, you see a perfect example of stability,” he said.
Mr Stout said this was in terms of its deficits, growth, debt and consumption.
The United States on the other hand, he believes has “no will to save and no will to change”.
This, he said, was becoming a significant concern for everyone involved in its markets.
According to Mr Stout, if deleveraging occurs in the United States, this will have a deflationary effect, which will cause prices to fall in the developed world across all kinds of products.
“All the demand has been borrowed from the future, which means there is no demand and no transparency in demand now, so prices will fall and volumes will fall. Gross margins will fall and companies will be fighting to preserve operating margins by reducing capital expenditure by reducing expenditure on advertising promotion, and of course employment,” he said.
However, Mr Stout said the opposite was true for those companies that do business within the developing world because it has rising real incomes, volumes and prices.
“It may be from a low base but it continues to be the main engine of growth in all kinds of industries that are exposed to those type of areas,” he said.
Mr Stout said when looking at any company or investment, investors need to remove the title from it and look at it in an objective manner.
“Then perhaps you can make a more objective and reasonable decision,” he said.
He said while prejudice and ignorance were damaging, it could also be utilised as a method for identifying mispricing, as this is something occurring regularly.
