View the article online at http://citywire.co.uk/money/article/a732473
Emerging markets bad but it's no crisis, says Kaloo
Devan Kaloo, manager of the Aberdeen Emerging Markets fund, admits he wasn't ready for the downturn but says a recovery may not be far off.
Devan Kaloo, manager of the biggest emerging markets fund, has urged investors to not get too gloomy about prospects for the countries and companies in which he invests.
Although his £2.7 billion Aberdeen Emerging Markets fund has fallen 9.6% in the past year, a decline more than double the average among his sector, Kaloo claimed the impact of the US reduction in money printing could have been worse.
Flight of capital
The US Federal Reserve’s decision to steadily cut quantitative easing has provoked a flight of capital from emerging markets. Western investors are betting that developed markets will do better as monetary policy is tightened. Some institutions and pension funds are thought to be reconsidering their allocation towards emerging markets.
Kaloo, head of global emerging markets at Aberdeen, admitted this was a worry but said investors should keep a long-term perspective.
‘This is my seventh emerging markets crisis in my career,’ said Kaloo who worked at Murray Johnstone before joining Aberdeen in 2000 and who experienced the periodic currency blow-ups in Latin America, Asia and Russia. ‘There’s always a tomorrow and ultimately it’s all about the companies,’ he added.
'Cyclical adjustment' not a crisis
In fact Kaloo’s argument is that the sell-off in emerging markets is not a crisis at all. While not wishing to make light of the situation, he points out that the disappointment of the past three years is that emerging markets have lagged behind developed markets, not that they lost investors huge sums of money.
And because, with the exception of China, emerging markets no longer peg their currencies to the US dollar, they’re better placed to pull through the current turmoil. By contrast, Kaloo said, in the past emerging markets had masses of dollar-denominated debt whose value ballooned as their currencies were devalued.
Although today's weaker currencies raised the spectre of inflation in emerging markets, it also gave them a chance to boost exports and claw back lost ground versus developed markets.
In short, Kaloo said emerging markets were experiencing ‘a normal cyclical adjustment’ to the fact that the cost of attracting money from the West was rising.
Watch Devan Kaloo talk more about the problems facing emerging markets
Soft closed and smaller
The Citywire A-rated manager was frank about the fund's recent shortcomings. ‘Bluntly, we have been in all the wrong countries and all the wrong sectors,’ he said.
His fund, which was removed from the Citywire Selection list of fund recommendations list after it was 'soft closed' last April, has seen outflows of around £600 milion in the last 12 months. Combined with market movements, these have shrunk the fund by £1 billion.
‘How long are investors willing to put up with underperformance? That is a question for our investors, but I would like to think they understand what we do and our comfortable with our performance for the long term and stick with us.’
‘We are in a situation where our companies have sold off and the question is, do we change and mitigate macro concerns because the Chinese market has less risks than Brazil? The answer is no, we buy more of our companies because they have now gotten cheaper.’
The manager said Aberdeen had suffered because of its long-term, bottom-up stock picking style, as ‘all people are concerned about at the moment is what China does and what the US does’.
However, he remained upbeat about the long-term emerging market growth story. Although companies in emerging markets have been hit by a double whammy of low growth and rising input costs, which have reduced their profitability, Kaloo said they now trade at a significant discount to their developed peers and are applying self-help methods.
'Encouragingly the recent difficulties faced by emerging market companies will refocus the attention of management on margins and removing excess costs,' he said. 'Consequently, once the cyclical slowdown turns into an upturn, companies should report stronger topline growth as well as widening margins which will drive a strong earnings recovery.'
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by Daniel Grote on Sep 23, 2016 at 17:01