With an extremely challenging macro backdrop and high levels of global uncertainty investors are cautious. However, compelling opportunities are presenting themselves.
Read the transcript of this video below.
2016 has been a turbulent year reflecting the huge challenges facing the global economy, as well as the high levels of investor uncertainty. A great example of this uncertainty and fear is the fact that close to USD 12 trillion of sovereign debt is currently yielding negative yields. This is clearly unsustainable over the long term and poses huge challenges for the likes of pension fund trustees.
Brexit has marked a negative for global growth and we are currently seeing corporates as well as markets revising growth expectations down for the US, the EU as well as Japan. Some market commentators are starting to talk about the probability of a global recession in the next 12 months increasing, some putting the probability as high as 40%. The effect that this is going to have, is pushing monetary policy normalisation out even further. I think it fair to say that investors face a very challenging global backdrop.
Taking a step back
It is very easy to get lost in the noise and one should always stand back to see what is really happening. Year to date, emerging markets (EM) have outperformed developed markets (DM) by 5.4% in dollars to the end of June. In fact, in June itself, EM outperformed by 4.6% despite a negative shock from Brexit. This is interesting because over the last five and a half years, every time we had a negative volatility shock in the markets, EM have underperformed. This underperformance is largely from the fear of US monetary policy normalisation; the fact that GDP growth differentials between EM and DM have been on narrowing; the end of the commodity super cycle and general fears about a China slowdown.
The right question to ask is, what has changed? I think the biggest thing is positioning. EM have seen tremendous outflows over the last five and a half years and global investors are very underweight EM. The EM currencies themselves have been under significant pressure, reflecting global pessimism towards the asset class. And now we are finding valuations themselves extremely attractive. If you compare the underlying EM economies to DM economies, their economies are actually very attractive with a lot fewer of the structural pressures faced by DM markets. And in fact some of the individual economies within EM have got self-help drivers that are independent of the global economy.
Now what…where to invest
Based on this extremely challenging macro backdrop, investors are constantly asking where to invest. We are convinced that now is the right time to start allocating capital to EM.
What do we know?
We know that over time EM significantly outperform DM. All the structural drivers of that outperformance are in place and ready to reassert themselves. Valuations themselves are extremely attractive and investors can benefit tremendously by diversifying into EM by not only increasing their return, but actually bringing down their risk, as the data shows.
What is Denker doing?
Here at Denker Capital, our approach remains unchanged. We look to invest in great businesses that are attractively valued. We do not see volatility as risk, volatility creates opportunities and we believe that we are well-placed to capitalise on them. Currently we are finding many opportunities to invest in exceptional businesses that are trading well below our assessment of fair value. EM themselves are cheap, unloved and under-owned. It looks as if the next cycle of EM outperformance could have begun.
By Neal Smith