Devan Kaloo, Head of Global Emerging Markets, Equities, at Aberdeen took on the role of a conjuror performing a magic trick with a couple of props, in a striking presentation to the investment conference. He gave a lesson to long- term investors in the importance of choosing the right time frame, with a pair of graphs that abruptly vaulted his audience from a pessimistic to an optimistic perspective on emerging market performance.
Mr. Kaloo used the first graph to acknowledge frankly that “over the past five years emerging markets have significantly underperformed developed markets – by something like 60%”.
However, as the next graph suddenly showed, “if you’ve been stuck in emerging markets for ten years, you’ve seen outperformance of about 40%”. Looking at markets on a long-term basis, he suggested that this decade-long period might be “the right time frame”.
He also pointed out that emerging markets underperformed developed markets by 8% in 2014 with a negative absolute return of 2% in U.S. dollars. But this still made emerging markets the second best performing asset class, doing better than Japan, Europe or the UK. While if you calculated returns in Euros, Yen or Sterling you made a positive absolute return.
In short perspective is important
Mr. Kaloo used his presentation to outline the potentially brighter future for emerging markets, with improvements in macroeconomic and corporate conditions likely to pay off in better stock market returns.
Core to his argument for a long-term assessment was the notion that temporary travails in emerging equities did not reflect fundamentals. “People quite often take the view that stock market performance in the short term reflects underlying issues in that market”, he said. However, “in emerging markets that clearly is not the case”.
This disconnect existed, Mr. Kaloo said, because emerging stock markets are often led by foreign investors. “Domestic institutional and retail investors are not consistent players in the market, so the guys who drive emerging markets are typically foreigners”, he explained. “This is important, because foreigners sometimes get concerned about different things from what’s actually occurring on the ground.”
For example, “what’s happening with quantitative easing, and the impact of the European Central Bank (ECB) and Bank of Japan, can have a large impact on liquidity flows into emerging markets, and a disproportionate impact on the performance of these markets”.
Moreover, because emerging stock markets are, in most cases, less liquid, it did not take much to send them up or down. “To put it in some sort of context, over the past three out of four years they’ve seen negative outflows”, he noted. “So there’s been a lot of money going out of emerging markets.” Or has there? Adding some clarity, Mr. Kaloo stated “Actually it’s not a lot of money. For 2014 we’re talking about $25bn. That’s a rounding error on the Federal Reserve’s balance sheet.”
“Although $25bn is not a huge amount of money in global macroeconomic terms, the illiquidity of emerging markets – largely because so much of the market capitalization is made up of shares that were not free-floating – meant that “it doesn’t take an awful lot of money to swing these markets around”, concluded Kaloo.