Emerging from the gloom

Emerging markets are the place to be over the next two years or so, argues Kurt Umbarger, portfolio specialist at global investment giant T. Rowe Price.

Australian investors have flooded ASX-listed international exchange traded funds (ETFs) with over $1 billion dollars of capital this year. While US-focused ETFs collected the bulk of those funds, capital flows could be decidedly different in two years’ time.

The conviction of Umbarger and the team at T. Rowe Price has seen around a quarter of its Global Equity Fund directed to emerging markets. The allocation is significant relative to global equities, and the strategy for the region is very much targeted.

To leverage the dominance of consumption in emerging markets, around 80 per cent of exposure is directed towards consumption patterns, mainly consumer staples and financials. Selected energy and material-focused companies also offer support.

Historically, emerging markets have offered rich pickings when it comes to commodities. However, with an expectation commodity prices will fall in the near future, Umbarger explains the fund has decreased exposure to commodity-rich economies including Brazil and Russia, the favoured countries for emerging market investors that comprise half of the BRIC acronym.

Although economic growth is expected to be tepid across emerging markets relative to previous years, GDP expectations still easily exceed that of the developed world.

Umbarger believes emerging markets have already adjusted to the prospect of Fed tapering, after an exodus of capital earlier this year caught many investors unprepared and wreaked havoc on currency and equity markets. While there may still be volatility, markets have largely factored in tapering.

As capital has fled emerging markets, this year will mark the first since 1997 developed markets will have finished in the green and not been outdone by their emerging peers. The underperformance of not just this year but really the last three has pushed valuations to low levels, while earnings per share have bounced back to 2007 peaks. 

To gain exposure to emerging markets, Umbarger prefers to buy into listed companies trading in the region, as opposed to multinationals to gain the desired exposure. While some fund managers prefer to buy companies in developed markets with exposure to emerging markets, Umbarger feels the revenue contribution from emerging market operations isn’t enough to significantly alter the bottom line.

The next two years or so will confirm whether Umbarger was on the money.