Emerging Markets Roundtable: Where to Invest Now

11/5/2016, Barron's

This year’s big rally in emerging markets likely won’t last, say four investment experts.

Emerging markets snapped out of a three-year rout this year, against an unlikely backdrop. Brazil was gripped by a scandal worthy of a telenovela, George Soros predicted Russia would be bankrupt in a year, and China and Mexico became punching bags amid a wave of anti-globalization sentiment. Despite the negative headlines, the MSCI Emerging Markets index is up 31% from a low in late January. That move far outpaces the Standard & Poor’s 500 index’s 13% advance, and marks the MSCI index’s best performance relative to developed markets since 2009.

Don’t expect the gains to last.
Matthew Benkendorf says investors have overreacted to bad news in Mexico.
Photo: Matt Furman
The sharp bounce reflects just how bad things were at the beginning of this year, as weak economic data in China spooked the markets and oil prices sank even lower, taking currencies such as the Russian ruble to new lows against the dollar. Then, in February, the Federal Reserve suggested it would hold off raising rates, allowing battered commodity prices and currencies to recover. In fact, a third of the equity gains came from the rebound in currencies.

The Fed’s restraint also sent yield-hungry investors back to higher-yielding emerging markets, with nearly $14 billion pouring into emerging market funds this year after a three-year period of net outflows that totaled $123 billion, according to EPFR Global.

Low interest rates worldwide have given emerging markets cover. Now the question is whether developing countries have done enough to clean up their financial houses, and implemented the reforms necessary to sustain the recovery. Barron’s recently convened four veteran emerging-market managers, to solicit their views on whether this year’s rally is the start of a new bull market—or a prelude to a correction. They are: Andrew Foster, former director of research at Matthews International, who now runs the $1.8 billion Seafarer Overseas Growth & Income fund (ticker: SIGIX); Arjun Divecha, head of emerging markets at GMO and lead manager of the $4.8 billion value-oriented GMO Emerging Markets fund (GEMMX); Michael Kass, who runs the $2.7 billion Baron Emerging Markets fund (BEXFX); and Matthew Benkendorf, chief investment officer of Vontobel Asset Management and subadvisor of the $7.3 billion Virtus Emerging Markets Opportunities fund (HEMZX).

Read on to learn where they are investing in now.
By Reshma Kapadia
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