There was a time not too long ago when such news as South Africa’s narrow escape from a credit downgrade that would have pushed its rating to below investment grade would have resulted in a marked retrenchment from that market. Today, though, these sorts of headlines no longer have the sort of impact they used to have.
South Africa, said Ben Rozin, senior analyst and portfolio manager at Manning & Napier, has a number of well-managed and highly profitable companies despite its macroeconomic woes. Enterprises like South Africa Breweries (SAB) and others in the Internet space have been key holdings in his portfolio and will continue to be.
“Today, the emerging markets are a very mixed bag so you can’t treat the space as a single asset class,” Rozin said. “Some countries do face negative headwinds, and South Africa has many troubles, but that doesn’t mean that there aren’t investment possibilities there and companies that are global in nature and attached to secular growth drivers.”
Searching for these kinds of opportunities in an attractive universe where valuations are down (emerging markets are trading at a 31% discount to the 12-month forward price-to-earnings ratio of the MSCI World Index) requires active management and good stock picking skills. It also requires paying attention to macroeconomics and global dynamics, both of which exert a great influence on developing economies. Going into 2015, investors will be closely monitoring a number of ongoing dynamics, not least the direction of oil prices and global geopolitics.
The sudden and unexpected drop in oil prices has proven as detrimental to countries that export oil, such as Brazil and Russia, as it has been a boon to those that import oil, such as India and China. The latter have also made optimal use of the oil price decline by wisely stocking up on their reserves, Rozin said, and this will help them out a good deal in the long run.
More importantly, though, the oil price boon adds fuel to the reform process that’s underway in both India and China. In 2015, those countries that step up on structural reforms are those that will prove to be the best investment destinations, said Anthony Cragg, portfolio manager of the Wells Fargo Advantage Asia Pacific and the Wells Fargo Advantage Emerging Markets Equity Income funds. In his view, the strongest reform momentum is taking place in Asia.
In India, for instance, the government of Prime Minister Narendra Modi has undertaken a series of reforms to tackle inflation and spur infrastructure, an area that India has sorely lagged behind in and that has constrained economic growth. In China, a whole range of fiscal reforms, as well as a major anti-corruption drive, are helping to make investing there more attractive. Cragg is positive, too, about the reform momentum in Indonesia and The Philippines.
This contrasts sharply with a country like Brazil, which not only is suffering from the fall in commodity prices but has also fallen off the track with respect to much-needed reforms for longer-term growth and stability, Cragg said.