“If you look at the emerging market flows, in other words money flowing out of emerging markets, then we had record levels. My sense is in the short term, you’ve seen the outflows, and investors are now going to focus a bit again on a few factors,” Kokkie Kooyman global fund manager at SIM Global, told CNBC Africa.
“One of them is valuations in emerging markets, [which] have come down a lot At the same time, developed markets are not that cheap, and the growth prospects aren’t that great either. I would say for a while, I wouldn’t be surprised to see emerging markets doing better than developed markets.”
Kooyman added that the big question going forward be heavily based on United States interest rates and their ripple effects on the rest of the world. Despite the emerging markets exit, the investment opportunities in emerging markets have not all turned to dust.
“As an investor, you’ve firstly got to think [in the long term for] about three to 10 years. Historically, most emerging market companies have much higher returns on capital, and that’s simply because there’s less competition. If you look at the bank in the US, or bank in the UK and Europe, it’s very competitive,” Kooyman explained.
“Margins are under pressure the whole time, whereas in emerging markets there’s lots of growth, margins are better so your return on capital is better. Over time, your emerging market companies tend to generate more profit, although the capital management isn’t often that good.”
In the short term, however, the risk in emerging markets will tend to be more in the form of currency weakness or higher interest rates. Emerging markets have however done well in the past as interest rates remained low for such a long time.
With US interest rates supposedly increasing as the market ends its quantitative easing programme, interest rates in emerging markets will increase. Turkey and South Africa are two of the major emerging markets that have already reacted to global market pressures and have increased interest rates.
“India and Indonesia, their currencies have stabilised, and South Africa, Brazil and Turkey currencies are quite weak. A lot is in the hands of the central banks. Is it a great opportunity [in the] short term? It’s risky. Longer term, I think your good emerging market companies will do quite well,” said Kooyman.