Aim for the long term.
With their high volatility, emerging markets are sometimes shunned by investors. Yet they offer good return opportunities, provided due diligence is done to invest wisely. Interview with Vincent Dostie, President of Mount Murray Investment, a firm that has been investing in emerging markets for several decades.
After a very good year in 2020, emerging markets are lagging a little in 2021. « Overall, the annual return level is pretty close to zero. Compared to the very strong U.S. economy, investors may be disappointed. However, in terms of valuation, the picture is more positive. Corporate profits are up. In most countries, the pandemic has not prevented the economy from reopening, » explains Vincent Dostie.
He gives the example of China, which despite an MSCI Emerging Markets Index at -16%, offers good investment opportunities. « Chinese companies have continued to perform, making valuations attractive, » he says.
According to him, an investor should devote at least 5% of his portfolio to emerging market equities. And you need to invest for at least 10 years, » he recommends. The binary approach of investing and divesting based on the rise and fall of stocks is not a winning strategy in our opinion. These fluctuations are difficult to predict accurately. These are economies that, while less diversified, are still at the stage of making big plans. This means that there can be ups and downs a little more frequently. It’s important to stay the course. »
« In these countries, there are companies that are able to become global leaders like Samsung, » he adds. And there will be more and more of them, especially in services, be it engineering, IT or financial services offered by fintechs. Those doing online transactions are going to become less and less reluctant to use technologies that come from emerging countries. These companies are going to be well positioned to serve their own countries and even export. »
Growing markets
Which of the 20 or so emerging countries in the MCSI should be on investors’ radar?
India is a fascinating country, and its economy is relatively independent of what is happening in other emerging countries, » says Vincent Dostie. The population is very young and very large, so the level of consumption is high. With the development of new technologies, it is able to move forward very quickly on the world stage. And because it is relatively self-sufficient economically, India should have the best economic growth in the world in the coming years.
In terms of market prices, Russia is another country that had a very good year in 2021, according to Vincent Dostie. It’s not a country you think about investing in at first because the governance is questionable, » he says. While the Russian economy is growing, the market has been shunned by global investors because of the economic measures taken by the United States. Yet the market’s long-term valuations are particularly attractive. It’s not a dominant country in our portfolio, but relative to the benchmark, we were overweight and our investments performed well this year. »
Brazil is another country to consider. People like to say that this is an economy with a bright future behind it, but in fact it has a bright future, » says Vincent Dostie. Brazilian companies, especially those that export, will generate good profits. You just have to have the nerves to get through the next year of presidential elections. It’s a country we’re slightly overweight on right now. »
Are there any countries to avoid? Not really, » he says. There are countries where we are more neutral, that we have underweighted like China because of the uncertain political situation that worries investors. We’re cautious by staying present in defensive sectors like healthcare, consumer durables or green energy-related technologies like solar panels. »