24th February 2014
Psigma’s chief investment officer Tom Becket has offered his views on which emerging markets he would ‘Snog, Marry or Avoid’. He says this is in response to an investment partner’s question in recent weeks.
In a note issued this week, Becket writes: “The question allowed us to differentiate between the countries of the industrialising world, something that most investors are unwilling to do. The last fifteen years has seen development across the emerging world, as a whole, but also of different countries in various directions.
“This means that as we stand in 2014, the emerging world is far more diverse than it was in the years of the Asian Financial Crisis (late ‘90s) and at the time of the last EM slowdown in the Great Financial Crisis of 2007-08. This makes the chances of a general and correlated EM slump far less likely, in our opinion. It also means that idiosyncratic opportunities are on offer for those who are willing to work hard to find them.”
Countries which Becket would avoid include what he describes as the economically attractive Philippines and Indonesia which are too expensive and Russia because of the uncertain role for listed companies in the economy. “Economic growth should be admired, but only if you are paying the right price for it”.
He adds: “Russia would be up amongst the no-go’s, despite the optically attractive valuations that are on offer, as we are far from convinced about the medium term outlook for the economy and for listed companies’ role in the country. We would also shun the politically problematic and externally dependent countries of Venezuela and Argentina, although they are small parts of the EM equation. We would also be unconvinced by the merits of Turkey, based upon political paralysis, inflation issues and structural financial weakness. Turkey’s many issues are a shame as the demographics are enticing and the country’s geographical location should be a blessing”.
Intriguingly, Becket says, that if he could marry anyone other than the long-suffering Mrs Becket, it would be China.
“You will know from previous missives that I am a committed Sinophile, but one should not let that cloud one’s investment rationale. It doesn’t here. What I find particularly exciting is the pervasive bearishness towards the country. This could make China a classic contrarian investment and the country (mostly via Hong Kong) is a key holding in our EM allocations.
“Loathed by investors and distrusted by economists, China currently offers something that not many other global markets do; value. The Chinese market has been a uniquely poor performer over the last three years and the massive falls allow investors an interesting long term growth opportunity at a fair price. Yes there will be periods of panic, as we have seen over the last few years, but we would encourage long term investors to trust in the government’s policies and look to the future. The future remains bright and patient investors will be rewarded”.
Finally his EM snog choice is India.
He continues: “Sorry ladies, but my snogging days are (mostly) over. However, my EM snog choice and another area of potentially improving politics is India, where the elections that are coming in the late Spring will hopefully bring a new dawn for Indian politics. The good thing for investors is that it surely can’t get any worse. We expect resounding change after the election and this should hopefully reignite the economy and spur the Indian equity market higher, benefiting cyclical equities and mid-cap companies, in particular. India has been classed as a weakly positioned country, because of its structural deficit, but this lazy branding ignores the efforts undertaken by the authorities, particularly the impressive Central Bank governor (Raghuram Rajan), to balance the financial system. The Indian market is inherently volatile, so this might be a shorter term trade”.