“The United States remains the place to be for investors, despite the significant outperformance in recent years. Nowhere are you better served as an equity investor. For emerging markets, caution is especially necessary after the recent debacles in China.
It is better to reduce overweight positions to neutral and wait until the fog lifts. Especially in China,” investment strategist, consultant and author Jan Longeval of Kounselor Consulting BV told Investment Officer in a recent conversation.
Emerging markets are not doing well despite years of positive analyses by investment strategists and asset allocators ‘across the board’. US equities are said to be too expensive and emerging markets offer more opportunities due to their lower valuations.
As a result, emerging markets have fallen to their lowest level in twenty years in relative terms compared to developed markets.
The total returns over the past ten years speak for themselves. For example, the US S&P500 rose by 368 per cent, the MSCI World ex US by +91 per cent and the MSCI Emerging Markets by ‘only’ 54 per cent.
Asset allocators are now becoming even more enthusiastic than they already were and are playing the emerging markets card to the full, anticipating strong outperformance in the years to come.
“It’s a theme that I have been hearing - wrongly - for more than ten years now,” explained Jan Longeval.
He is critical of such analyses. “China does account for 38% of a market cap weighted emerging markets index, and because of the new attitude of the Communist Party, which wants more equality and therefore wants to restrict many sectors such as education and the like, things are going the wrong way in China. As a result, you have to critically examine the case for emerging markets again, which I have done.”
Adjusted for sector differences, the performance differences are not that great. In the United States, the weight of technology is much greater.
Longeval emphasised that every week there is another sector that the Chinese government is targeting. “It is still a communist country that wants to teach successful entrepreneurs a lesson.”
Appreciation
On just about every measure, emerging markets are cheaper than developed countries, certainly the United States. Longeval stated unequivocally that “this discount in valuation is deserved. In my own portfolio, I was previously overweight in emerging markets because I was positive about a number of factors, especially demographic growth and the low debt ratio. I also stated this in my book “God doesn’t play dice on the stock market”. But I have changed my mind and reduced my overweight position in my own portfolio to neutral. I also advise my clients for whom I act as a consultant to do the same.”
Finally, Longeval thinks the low valuation is also an expression of “unsound management, especially in China. From a risk/return perspective, investors are well advised to wait and see.”
Least dirty shirt
Of course, regional choices have to be made in asset allocation. Longeval still draws the card of the United States, even after more than a decade of relative outperformance. “The US is the least dirty shirt in the investment world,” he said plaintively.
“All roads in the stock market lead to the United States. Europe has its own problems. Macro-economically, the United States is and remains the place to be. The exception is probably the European luxury sector.”
He pointed out that the US has the best corporate governance and the most innovation. “I do believe that the emerging markets and Europe can temporarily outperform. But in the long run, the picture is very clear to me,” concluded Longeval.
Tomorrow part II: interview with Gino Delaere, emerging markets specialist at Econopolis in Singapore.