With valuations at historical lows, now is the time for investors to start looking at emerging markets as way to build their long-term equities portfolio, said Charles Brandes, chairman of Brandes Investment Partners LP, at an emerging-markets presentation in Toronto on Wednesday.
“What has happened in emerging markets is absolutely revolutionary,” says Brandes. “I have been looking at emerging markets for over 40 years and I’ve never seen anything like what is happening today. This is a real historic event.”
Brandes adds that it is up to advisors to make sure clients are aware today of what is taking place so that they are not left behind when the potential rates of return for this market are realized in the next 10 to 20 years.
“It isn’t uncommon for investors to be scared after the bear market we’ve just been through, but they are doing the wrong thing when you see the valuations of good businesses that we see all around the world,” says Brandes. “Because of the fear that is going on right now it creates the greatest opportunity to build a long-term equities portfolio.”
Emerging markets, as a whole, have seen an average gross domestic product (GDP) growth of 5.2% a year over the past 20 years. Furthermore, these countries have seen their credit ratings increase and their sovereign debt as a percentage of GDP has been in decline since 2001.
In addition, emerging markets have seen their middle class become wealthier; in turn, they are saving more and spending more. Therefore, emerging markets can provide investors with strong economic tailwinds as well as low business valuations, says Carol Lynde, president and chief operating officer of Brandes Investment Partners and Co.
“Yet, despite all this, this region is trading at one standard deviation below its historical price to earnings valuation,” she says. “Clients need equities in their portfolios; they need businesses that generate excess long-term returns over inflation and it is within the emerging markets region that these opportunities are available — with lots of room to grow.”
The importance of emerging markets to the global economy will continue to increase. In fact, these countries have seen continual economic growth over the past decade, with their share of global GDP increasing to about 40% from 20% in 2000. In addition, they have also seen a higher percentage of global market capitalization, says Alphonse Chan, director of portfolio management with Brandes Investment Partners.
“When it comes to how much a client should be allocating to emerging markets, it is not too uncommon for retail investors to allocate around 13%,” says Chan. “It seems a little high, but back in the 1990s people were comfortable with 5%. I think 5% is a little too small right now with the percentage of global capitalization today.”