CLOSE

We permit the publication of our auditors’ report, provided the report is published in full only and is accompanied by the full financial statements to which our auditors’ report relates, and is only published on an access-controlled page on your website https://www.hermes-investment.com, to enable users to verify that an auditors’ report by independent accountants has been commissioned by the directors and issued. Such permission to publish is given by us without accepting or assuming any responsibility or liability to any third party users save where we have agreed terms with them in writing.

Our consent is given on condition that before any third party accesses our auditors’ report via the webpage they first document their agreement to the following terms of access to our report via a click-through webpage with an 'I accept' button. The terms to be included on your website are as follows:

I accept and agree for and on behalf of myself and the Trust I represent (each a "recipient") that:

  1. PricewaterhouseCoopers LLP (“PwC”) accepts no liability (including liability for negligence) to each recipient in relation to PwC’s report. The report is provided to each recipient for information purposes only. If a recipient relies on PwC’s report, it does so entirely at its own risk;
  2. No recipient will bring a claim against PwC which relates to the access to the report by a recipient;
  3. Neither PwC’s report, nor information obtained from it, may be made available to anyone else without PwC’s prior written consent, except where required by law or regulation; and
  4. PwC’s report was prepared with Hermes Property Unit Trust's interests in mind. It was not prepared with any recipient's interests in mind or for its use. PwC’s report is not a substitute for any enquiries that a recipient should make. The financial statements are as at 25 March 2017, and thus PwC’s auditors’ report is based on historical information. Any projection of such information or PwC’s opinion thereon to future periods is subject to the risk that changes may occur after the reports are issued and the description of controls may no longer accurately portray the system of internal control. For these reasons, such projection of information to future periods would be inappropriate.
  5. PwC will be entitled to the benefit of and to enforce these terms.
I accept
CLOSE

1. Select your country

  • United Kingdom
  • Austria
  • Australia
  • Belgium
  • Denmark
  • Finland
  • France
  • Germany
  • Iceland
  • Ireland
  • Italy
  • Luxembourg
  • Netherlands
  • Norway
  • Singapore
  • Spain
  • Sweden
  • Switzerland
  • USA
  • Other

2. Select your investor type

  • Financial Advisor
  • Discretionary Investment Manager
  • Wealth Manager
  • Family Office
  • Institutional Investor
  • Investment Consultant
  • Charity, Foundation & Endowment Investor
  • Retail Investor
  • Press
  • None of the above

3. Accept our terms and conditions

By clicking Proceed I confirm I have read the important information and agree to the terms of use.

Proceed

The Hermes Investment Management website uses cookies to remember your preferences and help us improve the site.
By proceeding, you agree to cookies being placed on your computer.
Read our privacy and cookie policy.

Short-term volatility masks underlying strength in EM

Home / Press Centre / Short-term volatility masks underlying strength in EM

Gary Greenberg, Head of Hermes Emerging Markets
30 October 2018
Emerging Markets

The tailwinds supporting emerging markets (EM) through the early part of the year gave way to headwinds and headlines of trade disputes, spiralling currencies and declining growth rates over the summer. In his latest note, Gary Greenberg, Head of Emerging Markets at Hermes Investment Management, explores the macro fundamentals underpinning the EM business environment, which remain more robust than the recent volatility might suggest.

Overcooked, mismanaged and in dispute: the troubled three
Turkey, Argentina and South Africa have captured the market’s attention and while the travails of the three nations are real, they are partially self-inflicted and can eventually be resolved.

Turkey has been running an overly loose monetary policy for several years, and the economy has become more vulnerable as the nation’s import bill has risen with oil prices, exacerbated further by US sanctions. The Turkish authorities’ unique and mistaken view that high interest rates cause inflation has exposed the lira’s weakness. In September, Turkey’s correct decision to lift interest rates significantly higher triggered a tailspin in its economy, but with Turkey accounting for 0.51% of the MSCI Emerging Markets Index, few EM equity portfolios will have been directly impacted.

Argentina’s failure to control inflation, combined with the strengthening dollar, has resulted in an extremely weak peso – which, as in Turkey, has further stoked inflation and currency weakness. That said, Argentina is yet to join the MSCI EM Index, so it presents little direct risk of contagion for EM equities, but a weak peso doesn’t help Brazil, Chile, Colombia, Peru or Mexico, nor has it helped EM debt portfolios.

With a 6.3% weighting in the benchmark, South Africa has a greater direct impact on EM stock pickers than Turkey or Argentina. The replacement of Jacob Zuma with Cyril Ramaphosa in 2017 as leader of the governing African National Congress was welcomed by investors but with a current account deficit of 3% of GDP, no more than adequate import cover, and significant exposure to the commodity cycle, the new administration has its work cut out for it on the external front, not to mention intractable domestic challenges.

Beyond the headlines
Looking beyond the troubled three, the strong tailwinds buoying EM at the beginning of the year have faltered, with local-currency depreciation, a stronger US dollar, and fears about China’s growth leaving investors with the familiar elements of EM storms.

Many of these headwinds will eventually abate however: the stimulus induced by US tax cuts should wear off next year; the dollar is near a 15-year peak and should weaken as trade and budget deficits begin to take their toll; and US policies could become less bellicose as their architect-in-chief deals with legal issues and, potentially, a Democratic majority in the House of Representatives following the mid-term elections in November. Automatic stabilisers resulting from Fed tightening are kicking in, raising the cost of short-term borrowing and tightening financial conditions generally.

Positive macro fundamentals persist through the headline volatility: we see reasonable growth, low interest rates and sensible economic policies in the majority of countries comprising the EM benchmark. EM companies are well-positioned to take advantage of this: forecast earnings per share across EMs for 2019 are stronger than those for the US and EM stocks are now trading below their long-term average[1], following an earnings-based recovery from depressed levels in the past year.

Earnings estimates have dropped in EM, but the quantum of the drop is far lower in local currency.  Earnings growth, like for like, in local currency, is decent this year. The consensus view extrapolates the dollar’s strength into a medium-term timeframe of three-to-five years, ignoring the short-term nature of the stimulus induced by the tax cut. As this boost fades, so will one of the main drivers of the US economy’s relative outperformance, reducing the need for rate hikes and therefore the main driver of dollar strength. As a result, the earnings of EM companies could appreciate in the terms of a weaker greenback.

Figure 10: Consensus views of earnings per share for MSCI EM stocks in local currency erms

These valuations are supported by improving margins and strong profitability, but can they persist? We think so: From a bottom up perspective, free cash flow yield is improving across many EM companies, in part because valuations are depressed but also because companies are generating more of it. Management teams have learned the value of capital discipline, sticking to their core business strengths and, in many cases, returning excess capital to shareholders. As the long-term prospects for global growth have dimmed somewhat in the past several years, EM companies’ capital spending have also become more cautious as they prefer to sweat their assets more heavily.

Taking a long-term view
To us, the highs and lows of 2018 have reaffirmed one of our key convictions: that EMs are not a destination for short-term trades but for long-term investment in high-quality, sustainable companies. Macro forces – from dollar strength to commodity cycles, political fallout or economic mismanagement – will inevitably buffet the universe, advancing or impeding stock prices. Like ourselves, the companies we invest in are able to adapt to turbulent conditions, acting with discipline and capturing long-term growth opportunities.  The insights gained from these experiences are valuable, capable of contributing to the positive, compounding returns throughout cycles that we have generated since inception and continue to seek – however strong the tailwinds or headwinds become.

[1] Source: Bloomberg as at 18.10.18

Share this post:
Gary Greenberg Head of Hermes Emerging Markets Gary Greenberg joined Hermes in September 2010 in the Emerging Markets team. Previous to this, he was Managing Partner at Silkstone Capital and Muse Capital, both London-based hedge funds he co-founded and managed in 2007 and 2002, respectively. From 1999 through 2002 he was Executive Director at Goldman Sachs in New York and London, where he co-headed the Emerging Markets product for GSAM, and served on the global asset allocation and European stock selection committees. From 1998 to 1999 he was Managing Director at Van Eck Global in Hong Kong and New York, where he was the lead portfolio manager for International Equities and ran the Hong Kong Office. From 1994 through 1998 Gary was Chief Investment Officer at Peregrine Asset Management in Hong Kong, managing and supervising global and regional equity, plus fixed income funds. In the early years of his career he was a Principal of Wanger Asset Management in Chicago, where he co-founded and co-managed the Acorn International Fund, which grew to $1.4 billion under his tenure. Gary holds an MBA from Thunderbird School, a BA from Carleton College and is a CFA charterholder. In 2017 Hermes Global Emerging Markets was named best emerging markets fund for the second year in a row at the Fund Manager of the Year Awards and best emerging markets group by Citywire Deutschland, and Gary was named best manager for emerging markets equity by Citywire UK.
Read all articles by Gary Greenberg

Find posts by author

  • Alex Knox, ACA
  • Amy Wilson
  • Andrew Jackson
  • Andrew Parry
  • Claire Gavini
  • Dr Michael Viehs
  • Emeric Chenebaux
  • Eoin Murray
  • Geoffrey Wan, CFA
  • Harriet Steel
  • Ilana Elbim
  • Ingrid Holmes
  • Jonathan Pines, CFA
  • Joseph Buckley
  • Kimberley Lewis
  • Louise Dudley
  • Mark Sherlock, CFA
  • Martin Todd
  • Maxime Le Floch, CFA
  • Michael Russell, CFA
  • Michael Vaughan
  • Neil Williams
  • Nick Spooner
  • Nina Röhrbein
  • Peter Hofbauer
  • Philip Nell
  • Saker Nusseibeh
  • Silvia Dall’Angelo
  • Tatiana Bosteels
  • Tim Crockford
  • Tommaso Mancuso
  • Yasmin Chowdhury

Find posts by category

  • emerging markets

Press contacts