Far too early to talk about emerging market bubble, says RBC GAM

GLOBAL - It is too early to talk about a bubble in emerging markets, according to the Royal Bank of Canada (RBC) Global Asset Management.

Phil Langham, senior portfolio manager for emerging markets at RBC Global Asset Management, told IPE: “Emerging market equities are currently trading at a bigger-than-usual discount to developed markets, and so far, only a relatively small amount has been invested in emerging markets. They make up merely 14% of the global market cap at present.

“It is very unusual to have a bubble when valuations are so cheap, as in a bubble market, valuations tend to be high. Emerging markets have a long way to go to catch up with developed market equities, which is why we are several years away from a bubble.”

Langham attributes the large emerging markets discount to the current slow growth environment and investors de-risking their portfolios in favour of bonds and at the expense of equities.

“In times of stress, equity correlations between all markets are very high,” he said. “But emerging markets should perform well based on their policy - in other words, monetary and fiscal - flexibility, and their state of finance, with much less public sector debt than developed markets.

“And the growth differential between emerging markets and developed countries continues to expand.”

RBC Global Asset Management focuses on countries with stronger balance sheets and domestic sectors such as consumer discretionary, telecommunications and healthcare at present, which benefit from rising wages.

“We are more cautious of sectors geared towards global growth such as energy and industrials,” Langham said.

He dismissed risks of political instability, saying it was usually confined to one country or region without risk of contagion, and that investments could be diversified enough to minimise this risk.

Corporate governance in the regions has over the last 20 years substantially improved as well.

“Emerging market companies are now very open to investor engagement,” he said.

Langham believes that, in time, emerging markets such as Qatar, the UAE and Saudi Arabia will open up to foreign investors and present them with new opportunities.