Investments  

Global view: Emerging markets set for years of pain

Global emerging markets are only at the first of three stages before a recovery can begin.

This first stage is called denial, where company management wants to believe lots of profits can still be had having sunk in a lot of investment. They are now in a prolonged period of denial and will keep throwing money at it for the time being.

The second stage of the process is when they start losing money and turn off the taps, before they enter the third stage which is when things get so bad that they start restructuring.

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That is the stage when you want to start investing again into the market but for me this third stage of the process is some three-to-five years away from now.

There has been a big change in the way companies themselves talk about emerging markets. They say it is more difficult to find growth and that it is becoming more expensive at a grassroots level. As such I see a background of increasing risk and dwindling opportunities.

Take China as an example. When it first started to really grow, almost everyone we met or read about was sceptical. No-one believed a communist government and a market economy could co-exist. But more than two decades of fabulous growth has proved us all wrong – or has it?

Most of China’s growth has been centrally driven – essentially government influenced enterprises spending government money on government directed infrastructure. But the next leg of growth is supposedly different. It is to be driven by consumption. Driving consumption is not quite so straightforward in a centrally planned economy. You can set all the targets and rules you like but the power for generating growth is now with the individual and his or her choices, not the central planners.

We think China looks more like a risk than an opportunity at the moment. Not a transient, macro type of risk, but a structural, over-optimistic, potentially money pit type of risk.

We have found it increasingly difficult to find interesting emerging market stocks to invest in. An increasing number get rejected by us because they look too risky. We have also found it increasingly difficult to find natural resource stocks to invest in.

The global fund I manage has particular underweights to the Far East emerging markets – China, Singapore, South Korea and Taiwan.

Where we do have emerging markets exposure it is in the low risk sectors such as utilities, airports and infrastructure.

Jeremy Lang is manager of the Ardevora Global Equity fund