Emerging markets (EM) have been through two ‘super-phases’ since the 1980s, Thomas Allraum, Redwheel co-portfolio manager, told a Russell Investments NZ webinar last week.
But the EM boom times remain a distant memory for most investors who have suffered through more than a decade of underperformance compared to developed world counterparts that Allraum labelled as “kind of unusual”.
“In the past there has been times when [EM has underperformed] but not over such a long period,” he said.
While the COVID-19 crisis snuffed out a budding revival in EM stocks about three years ago, Allraum said several factors now underpin prospects for a sustained recovery in the sector.
Many EM countries, for instance, have inflation under control after raising rates earlier than developed economies while eschewing the over-stimulative fiscal policies favoured in the West.
Against a backdrop of low inflation and higher growth, those emerging markets are now well-placed to lower rates to spur further economic expansion.
Other thematic trends such as rising capital expenditure, green energy policies, defence spending and even generative artificial intelligence should support EM economies that are essential in delivering associated raw materials or hardware.
Importantly, too, an expected fall in the US dollar is set to benefit emerging economies.
“There’s an inverse relationship between the two – a weak dollar basically means emerging markets are strong,” Allraum said.
He said an off-colour greenback usually comes with higher commodity prices and a shift away from investing in the US – both positive for EM stocks.
Excluding China – which is facing some idiosyncratic issues – the significant “tailwinds” are set to buoy EM countries over the medium- to long-term.
“We think emerging markets will outperform over the next eight to 10 years.”
Redwheel offers actively managed strategies across multiple asset classes – mainly in equities. The group launched the long-only EM equities fund in 2012, generating outperformance of about 1.6 per cent per annum since, Allraum said, with assets under management now at about US$9 billion.
He said the strategy follows an index-agnostic, growth-at-reasonable price (GARP) approach using top-down thematic inputs – including geopolitical risk advice from the high-powered consulting firm, Rice, Hadley, Gates & Manuel – coupled with an ESG lens and core bottom-up stock-picking skills.
Typically, the fund holds between 50 to 70 companies.
Founded in the UK in 2000, Redwheel rebranded last year from RWC, which itself was a 2008 initialisation of its original name of Red Wheel Capital.
Jordan McCall, Russell senior portfolio manager, told the NZ webinar that the group had recently increased the allocation to the Redwheel EM fund in its global equities multi-manager strategy.
As well as Redwheel, the Russell Global Shares Fund houses Man Numeric, Stonepane, Sanders Capital, Wellington, Oaktree, Nissay Asset Management, J O Hambro in addition to an in-house component.
Russell NZ head, Matthew Arnold, said Kiwi investors have tended to shy away from EM assets due to historical risk concerns and the dearth of options – especially those wrapped up in tax-effective portfolio investment entity structures.
Arnold said most either have no allocation or are underweight EM, which represents about 10-11 per cent of global share markets.