« Commodities and emerging markets: must-have investments or speculative bubbles »

Now that growth is back, emerging countries are in favour with many investors. Economic growth in these zones means commodities can also be profitable investments...

Article also available in : English EN | français FR

Now that growth is back, emerging countries are in favour with many investors. Economic growth in these zones means commodities can also be profitable investments but there are specific risks involved in these investments. Investors need to keep a close watch on domestic troubles and geopolitical tensions, while inflows from developed countries tend to be concentrated in the same zones


Economic growth in emerging countries is now back to pre-crisis levels. The IMF sees global GDP rising by 4.5% in 2015. Emerging countries represent 47% of global GDP but 70% of the increase. After 2014, their contribution is expected to be higher than that of developed countries. In addition, interest rates in emerging markets are higher than in the West. This attracts investors looking for better returns against a backdrop of abundant liquidity fuelled by accommodating monetary policies, and particularly quantitative easing in the US. Emerging countries have many attractive features. And yet they are under-weighted in institutional portfolios where they represent 6.5% of assets compared to an emerging market weighting of 13% in the MSCI World All Country index.


It has long been argued that emerging economies were decoupling from the developed zone. In fact, both areas are correlated. When slowdowns occur, the effects are felt worldwide but are less visible in emerging countries as they are catching up with the developed zone. In 2008, for example, developed countries were severely impacted but emerging economies also posted below average, albeit positive, growth rates. Their economic development is in part linked to trade with western countries.
The robust pace of growth has also set off a wave of inflation in emerging countries that has led to monetary tightening in China and elsewhere. Exchange rate policy in the emerging zone is at odds with economic fundamentals. China, for example, has adopted a development model based on keeping the Renminbi undervalued vs the dollar. The US has long criticised the undervalued Renminbi although there is in fact an implicit pact between the two countries: China finances the US deficit and the US acts as an outlet for Asian exports, thereby providing work for the Chinese population.


Over the long term, there is no systematic correlation between economic growth and stock market returns. Each is independent and must be analysed separately. In 2009, the emerging zone was the first to start growing again and this economic upturn went hand in hand with a market rally. Even so, there is no sign of speculative bubbles on these markets. The essential criterion is valuation levels. In 2000, using the PE ratio as a benchmark, emerging markets were cheaper than in the developed zone. Today, valuations are more or less the same and, in some cases, higher in emerging markets. China, which is growing by 10% per year, has a PE of 12 which is higher than the average for emerging countries (11). India is trading on 16 times estimated 2011 earnings. Russia, however, is on 6.7 times. The attractiveness of each country is reflected in its stock market prices. Fund managers at Edmond de Rothschild Investment Managers prefer to invest in discounted emerging markets or gain exposure to the zone by buying Western companies with a significant foothold in local economies.


Emerging countries consume large quantities of commodities to develop their infrastructure and industry. China, for example, swallows up 39% of global copper production and 40% of aluminium. There is a clear correlation between both investment themes, especially as some emerging countries like Brazil are big exporters of natural resources. We are currently in a phase of economic recovery and rising commodity prices which provide investors with interesting investment opportunities. However, even if these higher prices are not always excessive in the light of strong economic growth, there are still some causes for concern. First, some of the inflows into emerging countries are being invested in commodities, thereby driving prices higher. The second worry is volatility which is often partially linked to trackers like ETCs and ETFs which boost trading volumes and move prices. Political instability in certain countries also influences commodity prices and oil in particular. Lastly, a close watch should be kept on inflation which is primarily due to rising food prices.


Edmond de Rothschild Investment Managers is still positive on both themes. We recommend being exposed to these markets. However, we must now be more careful as the current economic and financial climate requires a highly selective approach. In 2002 and 2003, the discount was running at about 40% and economic growth was strong. Today these markets are no longer undervalued. There are still small discounted pockets but they need an ultra-selective approach to pay off. Absolute valuations are still attractive but there are inherent risks in investing in these themes and the result is higher volatility.

This is why we believe multi management is particularly adapted for investors looking for exposure to these markets as it cushions any downside in market corrections. To invest in both themes, we recommend two funds of funds with particularly good risk/return profiles: Géo-Energies, rated 4 **** by Morningstar, is a fund of equity funds which makes opportunistic investments in 4 main sectors: energy, mines and metals, agriculture and utilities. Multigest Emergents, rated 5 ***** by Morningstar, is a fund of funds invested in emerging country equities. The portfolio’s core holdings are in global emerging managers who complement each other in seeking alpha and fund managers specialised in a theme, region or a country. These local experts have an in-depth grasp of their market.

The multi management approach of both funds offers investment vehicles that give investors exposure to these themes and the expertise of specialists in diversified portfolios. This is particularly appropriate for emerging markets which carry a certain degree of risk..

Article also available in : English EN | français FR




In the same section