Emma Wall: Hello, and welcome to the Morningstar series, 'Why Should I Invest with You?' I'm Emma Wall and here with me today is Julie Dickson, Portfolio Manager for Ashmore. Hello Julie.
Julie Dickson: Good morning.
Wall: So, Ashmore specialise in emerging markets and this is an extremely interesting time for emerging markets. So far this year outperformed developed. It's almost exactly opposite of what happened last year. Why have they performed so well?
Dickson: Well, you never would have thought of it at the beginning of this year because of the way emerging markets actually pulled back in the first quarter as investors really sold off. We're really worried about China's growth and whether it could really sustain that 7% to 7.5% growth rate, and so far China continues to surprise on the upside.
Behind that you also have other issues, geopolitical risks that have taken place with Russia and the Ukraine. You've got the big elections that took place in India, but also Malaysia; you had the coup in Thailand; you had the elections in Turkey and then now you have the big one, the elections in Brazil coming up in October. So there have been a lot of things moving around in emerging markets. But behind that earnings have actually steadily continues to grow.
Last year, the earnings were – went through a period of softness for quite some time, were very dissipating. Investors are very concerned about the whole tapering of the QE program which really drove down the emerging markets whereas developed markets really took off and what you saw is this huge gap in valuations between emerging and developed which in our view doesn't really makes sense given that emerging markets are structured so much stronger, they are so much more able to weather the kind of concerns and pain that might come through from tapering that maybe developed market may not be so equipped to deal with.
So this whole notion of Fragile Five that became the Frugal Five then the Hot Five. We don't really subscribe to that but what's very clear is that investors are beginning to recognise that emerging markets are far more resilient despite all this negative news flowing through than one might think and the growth in China is quite stable, it's strong and what's very clear is that these markets, whether it's India or China or Indonesia or Malaysia or even Turkey, have the power, the tools at their disposal to deal with and promote growth in a way that developed markets may not be able to deal with. And that's I think what is the key thing that's driving investors to come back into emerging markets to really find that long-term sustainable growth.
Wall: It sounds then that this rally is indeed sustainable. This momentum will continue, if we've weathered all of the long list of geopolitical risks you have just mentioned. Going forward…
Dickson: For us, it's yes; that's the answer is that, in our view, we think the worst of the earnings cycle and the uncertainty is behind us. There are still a few other big ones, like I said, the resolution between the Ukraine and Russia, which in our view will be a political resolution and there will be a path where the sort of ongoing fighting will eventually go away. I think both sides have made it very clear they want to work towards to peace. That will drive sentiment to get more positive, and then of course, you have the elections in Brazil.
But beyond that, things are looking far more stable, more predictable, more reliable, and markets like certainty. So, as it starts to become more crystalized and the earnings start coming through, and the upgrade start picking up and we're already seeing that, some earnings are going to grow faster than others, like in Korea and China, we're already seeing earnings upgrades kicking up. Brazil is going to be a wait and see. India is going to take a little longer, but still the path towards recovery of that cycle is well on its way and I think that's what we're excited about.
Wall: So, if the risks then aren't necessarily as an investor about geopolitical background, are the risks and concerns about identifying which stocks are going to benefit in these growth environments?
Dickson: Absolutely, because one of the things that we've seen even emerging markets have pulled back, there is still have been some sectors that have done very well, consumer staples, healthcare, even utilities to some degree. The more defensive areas of the market have done well. So as investors sought to stay in emerging markets, they got very defensive. They went for the more reliable, predictable types of earnings or dividends that you might get from those areas. But as a result of that, they become quite expensive.
You have consumer staples companies in emerging markets that are trading twice the valuation levels of emerging markets as a whole. So 24, 25 times earnings for next year, whereas you have cyclicals, technology, consumer discretionary, the more cyclical areas, where they've had earnings depressed a little bit, trading around 10, 11 times earnings, so much cheaper.
So there is definitely some pockets of opportunities that are opening up now and the best time in our view, you have to a bit – willing to be a bit contrarian. But as the earnings cycle starts turn around, but markets still remain somewhat out of favor, that creates the opening gap and the opening opportunities to go in and start picking up some of the exposures in those areas.
Wall: Will those areas have a bit of volatility along the way however?
Dickson: There is no question it probably will have a little bit more volatility because again there is a little bit less earnings certainty and we're just at the beginning of the cycle. So some markets might go – some investors might go a bit ahead of themselves and some areas of the market may be coming a bit too early or too late and pull back. So, as we are working our through this turn in the cycle, there will be a little bit of volatility, but that's where the valuations are being created. So that's the stock pickers' investment paradise I would say, is areas like this. You are locking some value, you are going to start seeing it come through over next 6 to 18 months.
Wall: Julie, thank you very much.
Dickson: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
