There is a general theme across the premium branded asset managers that local equities are not offering much value and offshore equities appear more attractive.
Local equity valuations have been driven up by foreign investment as they seek better yields in emerging markets as developed countries keep lending rates low.
So then the debate moves to which area of the globe provides better value: emerging (EM) or developed markets (DM).
In support of EMs, Kokkie Kooyman of Sanlam Investment Managment (SIM) writes another interesting article on this issue. The full article, “SIM Global market review” is available under the section ‘fund manager comments’.
We have summarised the key points for your convenience:
- EM debt ratios and fiscal deficits are less than half of those in developed countries.
- EM potential economic growth rates are 5.8% vs developed economies’ of 1.6%.
- The higher EM growth is driven by lower debt levels, low cost of labour, and economies in the early stages of industrialisation demographics.
- EM equities have outperformed DM some 3.5x over the last 10 years.
In terms of flow of funds, which should continue to support the outperformance of EM over DM:
- The developed economies are in such a shambles that interest rates will stay low for a long time, which will continue to push capital towards EMs.
- Finally, developed world pension funds, with $19 trillion under management, have close to zero exposure to emerging markets. This could start flowing to EMs.
From an Investonline perspective the key question is: how much of the good or bad news is now discounted in these markets? The experts are struggling to put forward a convincing answer, which adds to the continued uncertainties in global markets.