Is now is the time to be overweight emerging and frontier markets?

Bearing in mind Donald Trump’s election in the US, the interest rate environment and uncertainty in Europe, what size of asset allocations do you think wealth managers and their clients should be making to emerging markets?

Now is the time to be overweight emerging and frontier markets.  EM represents 12-13 per cent of the MSCI ACWI Index, so I would recommend investors to have 15-20 per cent, depending on their risk appetite. 

Trump is positive for emerging markets. Trump is focused on increasing the growth rate of the US through tax reform, deregulation and increased infrastructure spending.  Although there is a lot of rhetoric on trade especially during the campaign, negotiating tariffs and agreements takes time and would result in reduced US and global growth.  I suspect President-elect Trump is very different from ‘Candidate Trump’, and we have evidence through what he has been saying and who is likely to join his administration.

Emerging markets peaked in 2007 and have been in a bear market since this year. This is the first year in the past five to six years that emerging markets have outperformed global markets with MSCI Emerging Market Index up 10.08 per cent, compared to the MSCI ACWI Index up 6.4 per cent.  MXEF trades at 11.6x 2017 compared to 15.2x for the MXWD.  Our portfolio is trading at 15.5x earnings and has earnings growth of 20-25 per cent, so we continue believe emerging markets offer solid upside potential.

With Mr Trump now likely to do a deal with Putin on Ukraine, Syria and sanctions, will this be a moment of opportunity for Russia to regain its former place in Brics allocations?

We really don’t know how Trump will deal with Putin. We believe that Trump will be able to engage with Putin much better than Clinton and Obama.  Regardless of the politics, we are bullish Russian and have had overweight exposure there for the past 18 months.  It is in Europe’s interest to lift the sanctions on Russia to increase much-needed growth.

Is Putin creating opportunities for the Russian economy to grow or will this be stifled by dysfunctional institutions and political approach to international business and trade?

The Russian economy will grow next year after two years of economic decline.  With the presidential election in 1Q18, he will deliver growth.

Are you concerned about Mr Trump’s interference in ground-breaking deals which may restrict development of Cuba and Iran as emerging markets or do you expect them to shine?

Cuba and Iran continue to be run by despot leaders. They have no intention of opening their economies for free trade, or at least have not put in any free market policies.

What are prospects like for Mexico and Brazil?

The prospects for Latin America or South America (ex-Venezuela) are very positive.  I met with the Brazil President last week and he is very interested in attracting investment.  The Mexican economy will benefit from the strong recovery in the US.

What will China look like amidst new trade squabbles with the Post-Trump US?

I don’t think we know, but I think China will welcome dealing with a business-minded strong leader. They understand how to do business.

Are there any other countries which could surprise us or provide good stories in the emerging/frontier markets universe in 2017?

I believe that emerging/frontier markets overall could surprise us in 2017 with very strong performance compared to the performance of other asset classes.  In particular, Brazil, Pakistan, Egypt and China could surprise with very strong performance.

While much of wealth management is focused on using low-cost passive investments, do you feel that it is key to choose active managers for emerging and frontier markets in the current climate?

Our fund has produced excess return of over 800bps per year. Given that we change 90bps I think our investors are getting good value from our product. Emerging and frontier markets are one of the investment asset classes where active management makes sense. What has hurt investors is that they have hired managers who are close indexers, so they charge high fees that give returns very similar to risk/reward compared to the index.