U.S. Retail

Emerging Markets Have 'Firepower' to Outperform

Emerging Markets Outlook: 2012

12/14/2011

Dilek Capanoglu, CIO of RCM Global Emerging Markets, cites emerging economies’ low debt-to-GDP ratios, attractive historical valuations and increasing global relevance as the fuel that will propel them toward sustainable long-term growth.

Summary

In an environment of more-muted global growth, emerging markets will remain strategically important.
Valuations are currently well below historical averages, and as long as global economic uncertainty persists, companies that generate growth domestically will be favored.

While external influences—such as news about the euro and economic growth of Western economies—will have a major influence on emerging markets performance, we believe emerging markets equities have a lot going for them. This, in the long run, should lead them to outperform. The current crisis is largely caused by concerns that the sovereigns will not be able meet their debt obligations, which is visible in widening credit spreads. The biggest risk factor here is that the euro-zone crisis might take a turn for the worse. In its wake, a further increase in general risk aversion might lead to further outflows from emerging markets and a continued de-rating.

This, however, cannot be the base-case scenario. Emerging markets have, for example, much lower debt-to-GDP ratios compared with developed markets. This is one of the reasons we have seen ratings upgrades for emerging market sovereigns and corporates compared with broad-based downgrades in the industrialized world. Contrary to general market sentiment, we believe that many emerging market countries have the necessary firepower to stimulate their economies.

Therefore, we expect economic growth in the emerging markets to remain strong, and we firmly believe that emerging market economies will continue to gain in importance in a global context as the developed world heads for a period of muted growth. Of course, we are going to see differences in growth within the emerging markets. For instance the GDP expectations for the CEE region look the most vulnerable to potential downgrades due to the region’s proximity and strong economic ties with the EU.

As an investor, it’s good to take a step back from the daily noise. Valuations are at very attractive levels, as they have fallen below their historical averages and are now trading at similar levels to previous emerging-markets crises, thus presenting highly compelling buying opportunities. We continue to focus on high-quality companies with solid balance sheets, good cash-flow generation and stable margins. As long as the uncertainty in the global economy persists, we will favor companies that generate their growth domestically.

Past performance is no guarantee of future results. The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.

A Word About Risk: Equities have tended to be volatile, and do not offer a fixed rate of return. Bond prices will normally decline as interest rates rise; the impact may be greater with longer-duration bonds. Foreign markets may be more volatile, less liquid, less transparent and subject to less oversight, and values may fluctuate with currency exchange rates; these risks may be greater in emerging markets.

P/E is a ratio of security price to earnings per share. Typically, an undervalued security is characterized by a low P/E ratio, while an overvalued security is characterized by a high P/E ratio. Gross Domestic Product (GDP) is the value of all final goods and services produced in a specific country. It is the broadest measure of economic activity and the principal indicator of economic performance.

Allianz Global Investors Distributors LLC, 1633 Broadway, New York, NY 10019-7585, www.allianzinvestors.com, 1-800-926-4456.