EMs look attractive; weak currencies to help: Aberdeen AMC

Every asset class, including the so-called safe havens, has fallen across the board on weak global cues, says Peter Elston of Aberdeen Asset Management. Emerging markets have been the worst hit from the outflow of money on the back of QE tapering.

But the interesting bit, according to Elston, is emerging markets are today trying to find their own source of demand, by growing domestic demand, and not just depend on the demand from the developed world for their products.
"What you now have is a situation where emerging markets represent very good value both in absolute terms and relative to developed market,” he told CNBC-TV18.
In that respect, he feels, emerging markets are in fact trading at attractive valuations. Even the Morgan Stanley Capital International (MSCI) emerging market index is on PE multiple close to being a single-digit and that is very good value given the long-term growth prospects. There has been some outflow from EM ETFs. However, Elston believes ETFs are not the right way to look at EM investments. Also Read: Short-term, markets are oversold: Marc Faber Below is the edited transcript of Peter Elston's interview on CNBC-TV18 Q: Do you see any big question marks arising about emerging markets as an asset class after its recent fall; do you think there is some medium-term apprehension that is creeping in into this asset?
A: I am not sure if the term creeping in is correct. Emerging markets have been hit very badly, but the feature of this recent financial market turmoil is that everything has fallen; safe haven assets, government bonds etc have fallen, corporate bonds, equities have fallen and commodity prices are falling as well. So, it is not that this is specific to emerging markets; it is everything across the board. Q: The experience or observation over the last few months though has been that emerging markets have been the hardest hit. Would you worry for that particular asset class and would you say there is much more to go by way of price correction there?
A: It depends on what sort of angle you are looking at. In terms of financial flows, portfolio flows there is a lot of investment in emerging markets from the developed world and when you have a change in monetary policy in the developed world or expectations of a change in monetary policy as we have had in the last month, there is a very big impact on emerging markets. You can also look at it from the perspective of fundamentals; emerging economies are to a large extent still fairly dependent on what is going on in the developed world. The developed world is the source of a lot of demand for products that the emerging world produces. So, that can also have an impact. But we are in an interesting transition phase where emerging economies are trying to find their own source of demand, they are growing their domestic economies and that over the longer term is what will be the predominant force. So, I think what you now have is a situation where emerging markets represent very good value both in absolute terms and relative to developed market. Q: Do you think that’s something that will be difficult to sell to global asset allocators or fund managers now because most people seem to be talking about reset where the US is improving and in the emerging market space valuations not withstanding, they are beset with problems like we have seen with China over the last few days. In a relative world, is the case for EMs strong or weak?
A: I am not sure I would agree with that necessarily. I think that there are certain emerging markets, emerging economies that have their own specific issues and China is a good example of that. But valuations and that’s ultimately what one as an investor should look at, try to ignore the noise and look at the valuations, look at dividend yields then you are not getting into territory that represents pretty good value.
It is hard to generalise across the emerging world because it represents such a huge number of countries and even within a country it is hard to generalise because you have got some companies that are doing well and others that aren’t. However, to the extent that one has to generalise, I think emerging markets, now the Morgan Stanley Capital International (MSCI) emerging market index is on PE multiple close to being a single digit and that is very good value given the long-term growth prospects. Q: There has been a lot of money which has gone out of emerging market exchange-traded funds (ETFs) over the last fortnight or so. Are you seeing signs of any such trends and even long only asset managers like yours where some investors are beginning to redeem?
A: We have seen some outflows, but this issue of ETF outflows is very interesting because we certainly understand that in certain markets ETFs have an important role to play, but the idea of using ETFs in emerging markets is absurd because emerging markets are quite inefficient. So, as an active manager it is possible to outperform indices much more easily than is the case in the developed world.
In the emerging world, you tend to be able to identify very poor companies much more easily and so having an ETF approach that invests in everything; the good, the bad, is a very flawed approach. So, ETF money coming out is probably quite healthy. But we have seen some outflows.
We always tell our clients that we are long-term investors and that is the way they should invest in our funds. So, when it comes to this source of disruption, we do not tend to see the same sorts of outflows that are seen elsewhere. Q: A large part of the problem that led to these outflows though was the rout that was there on emerging market currencies, on that, do you sense any stability now, do you expect to see a calmer run for some of these emerging market currencies?
A: A lot of these emerging market currencies have fallen too far. To the point, they now represent very good value. The way you can measure that is in terms of the impact that these cheaper currencies have on the economic performance; the performance of the export sectors in various emerging countries, a lot of companies in various emerging markets will be seeing a fantastic fillip from these lower currencies. In India, you have the technology sector, which is seeing a phenomenally profitable period at the moment as a result of low rupee. I think you have seen these currencies fall too far in the short term.