New perspective on Emerging Markets
Uncertainty around Emerging Markets has weighed down on financial markets in recent years. Nonetheless, is it reasonable to draw just one overall conclusion for a market consisting of 6 billion people spread around the world? We ask portfolio manager of SKAGEN Kon-Tiki, Hilde Jenssen, about the outlook for Emerging Markets in 2016.
Why should we believe that developments in Emerging Markets could turn in 2016 and generate better returns than we have seen in previous years?
The conditions for 2016 being a better year than 2015 are definitely in place. Global emerging markets currently trade at a significant and increased discount to industrialised markets. The discount is 40% on earnings and half price versus book equity, something that has not been seen since the late 1990s.
There are good opportunities to find interesting quality companies that are attractively priced in Emerging Markets. We still look for companies that are leading in their market areas and which are well equipped to resist external shocks and macroeconomic conditions.
Why do you think that there is so much pessimism around Emerging Markets?
Uncertainty in China, corruption in Russia, South Africa and Brazil as well as commodity prices which are continuing to fall are some of the main reasons for the increasing pessimism surrounding Emerging Markets. Emerging markets are still regarded as commodity suppliers whereas established markets are categorised as commodity consumers. Over the past decade, however, many global emerging markets have made the transition from being commodity exporters to importers.
The demographics in these new markets are changing with a growing population and the conditions for increased growth are strong in these regions. This means that the service sector will play an even greater role in these markets as the level of prosperity improves.
What do you think gives the greatest cause for concern in Emerging Markets at present?
China is still the big question mark. In the absence of a large stimulus package from the authorities, we still anticipate low industrial growth in China. However, it seems that the strong growth in the consumption and services sector will continue, and perhaps accelerate. The framework for this seems to be in place as savings are high, household debt is low and wages are rising.
Many worry that the weak momentum in manufacturing production will prompt the country to devalue its currency. This does not seem to be logical view in our opinion. The country has the world's largest balance of trade surplus, and the terms of trade are already improving substantially as a result of the decline in global commodity prices. Besides this approach would be at odds with their targets of increased productivity and improved purchasing power.
There was a reduction in the number of companies in SKAGEN Kon-Tiki in 2015. What is the reason for this?
After the weak investment performance in 2014, we started a process to re-evaluate our risk processes, review our buying and selling discipline and better formulate investment cases in 2015. This does not mean that our time-tested investment philosophy has changed, but we have evaluated and adjusted the processes for putting it into practice. As a result of the review, we bade farewell to over 30 companies in 2015. The portfolio now has a concentration ratio that is similar to what it was in the fund's infancy.
In 2015, SKAGEN also increased its focus on environmental, social and governance-related factors (ESG). By increasing the focus on these factors in our analysis of investments, we have also reduced the business risk. We are already seeing the positive effects of this.