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Justin Urquhart Stewart: Reality Bursts Balloon of EM Complacency…

I know we should not applaud losses in value, but there are times when a shot of reality does every investment market the power of good. Maybe we have seen such a moment recently. For years, we have put up with marketing guff related to the “emerging markets” which seem to vary from the ill informed “little englander” waving a Union Jack and fondly recalling an imaginary British Empire, to overly technical evaluations of the economic situations in these nations. In fact, this entire sector has been dominated by marketing spin with fairly fatuous acronyms being made up to string together a set of countries into some form of investment opportunity.

We are – of course – far too familiar with the tired acronym courtesy of Goldmans, of how the BRIC countries used to market their related fund. This morphed into BRICS with the addition of South Africa in order to boost flattening sales. This was astonishingly effective as everyone from private investors to tabloid journalists all became familiar with the term. In reality, those familiar with those nations will know that they have, in fact, nothing in common with each other, other than being big and developing, which I suppose is something at least – but there it ends.

Each of these economies operate in a very different structure, from their politics through to their economic disciplines. Thus, to lump them together into a single fund or portfolio is in my view sloppy thinking and lazy investment management – mind you it’s great marketing and I can’t knock that.

When it comes to emerging markets, I can at least bring to bear my own working and family experience to try and counter that particularly pompous view from the Occidental investment managers that the emerging markets are a single homogeneous asset class. That is not to say that investing as a group or sub group is inappropriate, but only that one needs to be aware of the fundamental differences within the sector.

To me, there is a similar pattern with something far more familiar to most of us and that would be our old friend – the FTSE100 Index. Here is an index (which doesn’t even have exactly 100 stocks in it – how quaintly British), which is a mélange of stocks from differing sectors, countries and sizes but all bundled into a single grouping. This as we know from the popular news programmes is quite erroneously quoted each night as a pseudo measure of the UK economy to which of course it has barely any connection.

So, back to the emerging markets…. The taper tantrums that have struck in many emerging markets have resulted in some sudden and quite dramatic falls in their equity indices, bond valuations and currencies. Only a few weeks or so ago we had a range of such nations like Russia, India, South Africa and Turkey all raising their interest rates going off one after the other like a line of trip switches on your household fuse box.

The result is now that we can see far more clearly those emerging nations which are working it through and those who seem to be submerging – like Argentina – which, in fact, has had the humiliation of being relegated down to the category of Frontier markets. Well, that is hardly surprising when looking at the last desperate attempts at survival of the political incompetents who have yet again destroyed the economy of that beautiful country.

Nations with any combination of poor current account deficits, high overseas debt, heavy commodity dependence (especially Chinese related) and failing political confidence, will be feeling exposed. So from countries like Indonesia and Thailand to the fiasco of Venezuela, these are the weakened nations. Whereas the likes of South Korea, Malaysia and Mexico are looking in certainly better – if not actually finer – fettle.

Of course all emerging markets are not the same. The problem then lies in how to invest in those that are successful in a manner which is both reflective of their strength, success and opportunity, and being sufficiently liquid to trade in. Personally, I see recent events as a chance to clear the market of distorted views and values and to focus on far better investing opportunities. Sometimes bad news really can create some good news.


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