EMs hold strong appeal for investors right now: Zenith

Emerging markets (EMs) are a compelling proposition for investors right now, particularly from a valuation standpoint, compared to more expensive developed markets, argues Zenith investment director David Wright.

This is particularly so given that some EMs are already looking to cut interest rates, Wright said, well ahead of the anticipated rate cuts in developed markets (DMs).

“Some emerging markets are ahead of developed nations in easing monetary policy, which is very supportive of share markets and growth potential in an already attractively valued space.

“This is something which we think is very appealing for portfolios going forward,” Wright said.

EMs also offer considerable diversification benefits for investors, owing to their lack of correlation with DMs.

“This includes exposure to sectors not generally available locally, such as high-growth technology, which is now the largest sector in emerging markets, and that can enhance long-term investment returns,” Wright said.

Wright, however, cautioned that, given the complexities of investing in the EMs space, active management is critical to ensuring that the best investment opportunities are chosen and that risky markets are avoided.

Investors ultimately take on greater risk in EMs to achieve higher returns, Zenith said.

Current opportunities & risks

For Wright, Vietnam and India present high growth opportunities for EM investors, with both economies being spurred by rapid urbanisation and population growth, as well as relatively young workforces, relative to developed markets. Governments in these countries, he adds, are also supporting reforms to encourage economic growth.

Large parts of Latin America and South America, on the other hand, are beset by political instability, high inflation and currency depreciation, which carry higher risks for investors, he said.

China’s once reliable economic growth spurt has hit a wall, perhaps most evident in the flagging property sector.

“China too has been more volatile given concerns around the property sector. Its debt-fuelled real estate sector has dragged down economic growth overall, as highlighted by the collapse of Evergrande,” Wright said.

“We’re still seeing the Evergrande hangover with a material pipeline of unfinished projects and a significant decline in consumer confidence.”

Given persistent concerns over its property sector, slowing economic growth and potential contagion Wright said Zenith’s active manager selected exposures for China remain underweight.