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Emerging Markets Will Make Journey Back From Fear To Fact, Insists UK's Ashmore

Many investors appear nervous about emerging markets, as shown by last year's relatively poor performance but one specialist in the field believes fear will be replaced by more reassuring fact.
Several wealth managers and private banks reckon that emerging markets, once the darling of investors, might struggle a bit for a while this year while developed economic regions continue to push ahead. One emerging markets specialist, however, is unfazed by what it sees as short-sighted thinking.
Ashmore, the specialist emerging markets firm, reckons that the sort of selloffs to emerging markets that have occurred recently often start because investors ignore how such sectors respond to global changes such as the end of central bank money printing.
The investment house will hope its predictions come true after its shares were hit hard yesterday, falling as much as 11.9 per cent, one of the largest daily falls over the past 12 months, after the firm reported a fall in AuM to $75.3 billion at the end of last year, down from $78.5 billion at the end of September. The firm invests almost entirely in emerging markets - an approach that has reaped rewards when such markets boomed but has proven problematic when they struggled last year.
But the firm's own commentary suggests its faith in the sector hasn't waned.
“In the face of uncertainty, investors turn to out-dated notions of EM fragility and let themselves be guided by past behaviour. Selling ensues, regardless of the state of affairs in EM,” Jan Dehn, head of research at the firm, said in a note.
Dehn's comments come at a time when some firms, such as UBS and Societe Generale Private Banking, see the developed markets - with some caveats - as offering more promise this year, at least for a while. This picture contrasts with how emerging markets were seen as the better bet in the aftermath of the 2008 financial crisis.
Only so far
“This irrationality only goes so far, however. Fact eventually defeats fear with rewards to those who pay attention to value. 2014 is likely to be the year when fact defeats fear. Meanwhile, away from EM [emerging markets] the combination of weak payroll data in the US and the re-commencement of Fed tapering increases the risk of a stock market correction in the US, and in Europe the ECB took out further insurance against another attack from Bond Vigilantes,” he said.
Dehn knows that recent market movements have seen a retreat to some – not all – emerging market indices. The prospects that the US Federal Reserve will start to taper, or wind down, its quantitative easing programme, coupled with some worries about the slow pace of reforms in countries such as India, has dented confidence. In 2013, the MSCI BRIC Index fell 3.5 per cent; the MSCI EM Ex-Asia fell more than 9 per cent last year. (All figures are in dollars.) By contrast, developed market indices, such as the S&P 500 Index of US stocks, have risen by more than 25 per cent in the 12 months to 7 January.
But while in the short run, the reversal of fortunes between emerging and developed indices has been striking, Ashmore’s Dehn says that there are strong underlying reasons for being positive on the emerging side.
“Notions of EM fragility are strongly influenced by past experience, often dating back as far as the Cold War era nearly a quarter of a century ago. Back then EM economies were genuinely vulnerable to developments in global variables, such as commodity markets, global sentiment, flows from developed economies, changes in US interest rates, etc. but much has changed in the intervening period and knee-jerk selling is completely irrational,” he said.
Opportunities
“Somewhere along the familiar journey from fear to fact that always follows change in the global environment sophisticated EM investors begin to spot opportunities,” said Dehn.
“Usually EM fundamentals remain pretty solid – after all, there are more than 65 investable countries in the asset class and they are so different that no change in the global environment will ever have the same impact on all of them. Once the initial surge of outflows abates and the asset class has re-priced the mismatch between fundamentals and prices begins to become obvious. Facts begin to displace fear. Investors with good knowledge of the EM universe and a keen sense of value begin to buy, locking in great future returns soon after the market stabilises,” he said.