Emerging Market Slump Hides Opportunities Within

It’s an election year across the developing world, and that means both political and economic instability. As a result, fund managers see greater volatility ahead for emerging markets.

On the other hand, there are pockets of stability and opportunity within those markets. Plus, in some regions, economic growth and investment expansion continue to outpace what’s taking place in the U.S. and Europe.

“Without a doubt, this is going to be a very tricky year, as it’s dominated by elections, and to be elected incumbents will do what it takes to win at all costs,” said Maria Negrete-Gruson, emerging-markets portfolio manager for Artisan Partners, in an interview with ThinkAdvisor. “This means spending beyond [these countries’] means, inflation can creep up, and the central banks intervene or postpone action.”

But while the overall outlook for emerging markets this year is “not pretty from the top down, since it catches them in really bad shape in terms of their fiscal and monetary discipline,” Negrete-Gruson says, it does also offer investors “robust opportunities” in the consumer-discretionary sector, for example.

This group has plenty to offer investors, she says, though not necessarily in the rapid expansion of price-to-earnings multiples. “But the earnings power ticks along not with global trends but more with their business models and market penetration,” the analyst explained. “It’s about nitty-gritty, ground-up investments.”

That strategy does expose you to a nice dose of risk — which you want to play in a way that works in your favor.

“In an environment like this one, of maximum volatility, opportunities emerge, and we try and take advantage of them,” Negrete-Gruson said. 

Some Artisan investments, she point out, are in companies that are paid for their exports in dollars, and that minimizes currency exposure — such as iron-ore producer Vale of Brazil.

Are the upsides of these opportunities enough of a reason to invest in emerging markets?

No Pain, No Gain

“When an asset class has issues, it can be beneficial to invest when the [maximum] pain has been reached,” noted John Derrick, head of research for U.S. Global Investors and a manager of the firm’– Emerging Europe Fund, in an intervew. “The emerging markets are not going away and will be [the world’s] growth vehicle for the next decade or so.”

The overall emerging-markets benchmark index fell about 2.5% in 2013. Plus, it’s down a total of 6% for the past three years, while U.S. equities have risen about 60% in the same period.