The normalisation of the US rates curve will act as a major trigger for emerging market growth, GAM’s Tim Love has said.
With investors fixated on a potential re-run of May 2013’s taper tantrum, Love said a rates rise would actually be a positive for the developing world.
‘Emerging markets have historically done very well post a hike in US interest rates, typically delivering an uplift three times higher than the proceeding down phase,’ Love said.
‘A normalising of the US yield curve in the next three to six months will be a starting pistol to become more aggressive on deep cyclical stocks, for example shipping and rare commodity stocks.’
Love said this could translate into growth of close to 100% over the next four years, which is based on predicted earnings growth of 15% and dividends of approximately 3%.
Love, who runs the JB EF Emerging Equity fund, believes investors should focus on stocks with strong free cash flow, dividend coverage and robust balance sheets to capture the region’s growth potential.
He said this growth will be supported by inflows from captive pension funds and money moving from fixed income into equities as investor risk appetite recovers.
‘In order to make the most of the opportunity investors need to buy ahead, as soon as a bottoming out of lead indicators becomes visible. The key - as always - will be allocating capital at the right time rather than being paralysed by fear.’
Lowered oil prices and reform
Looking at the current market, with only a few exceptions, the majority of EM countries have benefited from lower oil prices, especially China, India and South Korea, Love said.
Focusing on China, he added the restructuring of the country’s financial markets and reforms that benefit both private and state companies will positively impact share prices.
‘The healthcare, consumer, energy and banking sectors all offer opportunities, but it is the quality of earnings at a company level that really counts,’ said Love.
‘Despite a poor earnings season, investors are supportive of the political changes underway, which prioritise infrastructure and tax incentive beneficiaries.’
According to the April fund factsheet, China makes up 22.8% of the fund, while South Korea comprises 14.7%. Samsung Electronics is the largest holding followed by the Chinese investment company Tencent.
The JB EF Emerging Equity fund was launched for the former Citywire A-rated manager in February this year, which followed GAM’s decision to merge-away his existing strategy.