- Superior structural growth prospects relative to developed market economies
- Good correlation between economic growth and equity market performance over time
- Supportive current valuations, especially given superior fundamentals
HONG KONG, 5 March 2012 – Stronger growth prospects combined with reasonable current valuations and better fundamentals, mean that investors should look to the emerging markets for superior equity market returns looking forward, says Alex Homan, Fidelity Worldwide Investment’s Head of Emerging Markets Equity Product.
An analysis of performance between December 2000 to December 2011 shows how countries with stronger economic growth - many of which are represented in the emerging markets complex - have outperformed countries where GDP growth has been more muted. This relationship is not surprising, as a stronger economic backdrop provides a powerful tailwind for businesses operating in those geographies.
"In terms of performance, Colombia, Russia, the Czech Republic, Indonesia and Peru were well out in front, followed by a string of other emerging markets, after which the developed economies began to appear," says Mr. Homan. "Only Australia got close and that’s because it has benefited from the massive demand for resources from Asia’s growing economies – it’s been a developing market play."
While the analysis is based on the past ten years, Mr. Homan is confident about the future prospects for the emerging markets for two main reasons. First, the ability to fund economic growth across the developing economies is far less constrained than in the developed world. Second, the emerging markets offer attractive valuations for superior levels of profitability and better growth prospects.
"As inflation concerns moderate in the developing world, public, private and domestic participants are in a much stronger position to fuel economic growth," says Mr. Homan. Sovereign, private sector and household debt levels in emerging economies are generally much lower than those of the developed economies, thereby providing greater scope to fund growth.
Fidelity believes that emerging market countries will be responsible for the bulk of global GDP growth over the next couple of years. "We estimate that emerging markets accounted for about 80% of global real GDP growth in 2011, up from 73% in 2010," says Mr. Homan. "We expect this share to stay at around 80% in 2012."
However, Fidelity adds a note of caution. On average, 11% of emerging markets’ GDP is exported to the main developed regions of the US, Eurozone, UK and Japan. Should growth remain depressed in any of the main areas of the developed world, exporters will suffer. Exporting countries that are more vulnerable to an economic downturn in developed countries are those in the former Eastern Europe, such as the Czech Republic and Hungary, which rely on trade with developed territories such as the Eurozone for approximately 50% of their GDP.
Countries whose economies are less reliant on exports and which are therefore more insulated the vagaries of the developed economies include Brazil, Taiwan and India, with only around 5% of their GDP dependent on exports to the developed world. .
Mr. Homan notes that the developing consumer markets in countries like these along with, in many cases, an abundance of the resources that stand to benefit from both rising structural demand and any shorter term price inflation effects offer a cushion in the event of an economic downturn elsewhere, and better prospects for growth in the future.
"Obviously, other country-specific factors play an important role, but a strong domestic economy seems to have a positive effect on market sentiment and return," says Mr. Homan. "And emerging economies still stand to grow faster than most of the developed world for the foreseeable future."
Fidelity Worldwide Investment is a global leader in asset management, providing investment products and services to individuals and institutions in the UK, continental Europe, the Middle East and Asia Pacific. Established in 1969, the company has over 5,000 staff in 24 countries and manages or administers client assets of US$262.6bn. It has over 7 million customer holdings and manages more than 740 equity, fixed income, property and asset allocation funds. The company’s fund managers receive research from one of the largest proprietary research teams, based in 12 countries around the world. Fidelity Worldwide Investment is an independent asset management company which is privately owned.
Data as at 31 Dec 2011
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