Fund managers often complain at this time of year about why they have to write reviews of the previous calendar year for an Annual Report. After all, other than the auditors, few read these reviews. Most investors are already well acquainted with the content, having experienced it through daily NAV changes and monthly factsheets.
However, it is not a complete waste of effort as these reviews do preserve for posterity exactly what we, as market participants, were actually thinking at that time. I for one cannot claim to recall every memory of each quarter or half year over the past 30 years, and the charts and figures on Bloomberg, while helpful, do not tell the whole story.
With that in mind I decided to re-read some of our thoughts from a time when Emerging Markets last enjoyed a period of outperformance, the last real bull market from 2003 to 2007. Even if history does not always repeat itself there are a sufficient number of similarities between then and now to make the exercise worthwhile.
So, let’s take you back to 2003…
2003 EM Returns +56%
“The opening quarter of 2003 proved difficult with uncertainties in the Middle East then compounded by the rapid spread of SARS in the Asian region…..The American-led military intervention in Iraq served to dispel some of these uncertainties. Starting from this depressed April base, regional markets embarked upon a bull run that continued unabated until the end of 2003.” Certainly some echoes here in 2020, thankfully, without the military side of things.
We went on to note that “another [major positive factor] has been the continued accommodative monetary policy of the Federal Reserve.”
A final point from 2003 was: “2003 also proved to be the year when the sheer size of the Chinese economy finally made its impact felt in the global economy.”
2004 EM Returns +26%
2004 was a year of worry, inflation being one of them. Would the Fed overly tighten monetary policy? The Chinese introduced administrative measures to slow the economy, would it crash it? Market “unfriendly” political parties won elections in Taiwan and India, would that destabilise things? In the end none if this mattered, the Fed began tightening, with a move from 1.0% to 1.25% in June, but the Dollar kept falling, and emerging markets had another good year.
2005 EM Returns +34%
It was more of the same, but the worry is beginning to dissipate. “This excellent performance was underpinned by rapid economic growth, stable and favourable external accounts and further improvements in corporate profitability”. No doubt this external strength was just the opposite side of the US twin deficits at the time, something which again echoes today. At this stage, commodities were moving higher and as a result, Russia was the top performer, followed by Brazil. Putin was in charge in Russia, some things never change, and Lula in Brazil. Markets were also betting on Turkey ahead of its imminent EU inclusion!
It’s worth remembering that Alan Greenspan’s Fed moved rates from 1% in mid-2004 to 5% in mid-2006 when, after 2 decades in charge he finally handed over the reins to “Helicopter” Ben Bernanke. Yet throughout this period bond market yields moved much less and the Dollar stayed soft.
2006 EM Returns +32%
Things are really moving now, but this full year success hides a brief but violent 26% correction in May 2006. It was, however, the year of the BRICs and at its conclusion we wrote: “2006 proved to be another year of excellent returns for Global Emerging Markets, the fourth year in succession that the asset class outperformed developed markets… Multiple expansion…combined with strong earnings growth has pushed the index up over 200% from the [2002] lows. The significant appreciation of a number of currencies against the US Dollar has also played its part.”
Yet, despite all this “the emerging market universe was still trading at an approximate discount of 15% to the developed world in price earnings ratio terms.”
2007 EM Returns +39%
The blowout year, and perhaps the writing was starting to appear on the wall. We wrote: “To a large extent it must be assumed that the re-rating of Emerging Market equities is largely complete…. the asset class now trades at a small premium to the developed markets for only the second time since 1995”. Hardly calling the top, but at least it was a note of caution.
And well, yes, the rest, shall we say, is history. There is no need to delve too deeply into what happened in 2008 except to say two things. First, it was a global problem, not an emerging market one. Secondly, it was China’s debt fuelled, fiscal bonanza in 2009 which helped to pull the world out of its tailspin, at not inconsiderable cost to itself. How many times since have we had to defend China’s elevated debt to GDP ratio?
So what conclusions can we draw from this trip down memory lane?
First, in those early years of 2004 and 2005 particularly, there was constant worry about inflation and Fed tightening, and in fact anything else we could find to worry about: the fabled wall of worry. We were far too cautious and there are similar fears around now.
Secondly, yes there was a re-rating during this time, but much of the fourfold return was driven by strong profit growth. Again, we were all far too cautious on corporate earnings as well. So worrying too much about valuations at this stage is unhelpful, not that they are stretched today anyway. (A New Emerging Markets Bull Run…).
Finally, these things can, and often do, go on a lot longer than most people expect. And while the end is genuinely unknowable, reading between those lines written in early 2008, there may have been a hint of “blimey, we have had a good run, how much more is there?”
History does not repeat, and the world is a very different place from 2003, but there are enough similarities to make it interesting. Last time there were 5 straight years of emerging market outperformance; this time we have had just one.
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This document has been issued by Aubrey Capital Management Limited which is authorised and regulated in the UK by the Financial Conduct Authority and is registered as an Investment Adviser with the US Securities & Exchange Commission. You should be aware that the regulatory regime applicable in the UK may well be different in your home jurisdiction. This document has been prepared solely for the intended recipient for information purposes and is not a solicitation, or an offer to buy or sell any security. The information on which the document is based has been obtained from sources that we believe to be reliable, and in good faith, but we have not independently verified such information and no representation or warranty, express or implied, is made as to their accuracy. All expressions of opinion are subject to change without notice. Any comments expressed in this presentation should not be taken as a recommendation or advice.
Please note that the prices of shares and the income from them can fall as well as rise and you may not get back the amount originally invested. This can be as a result of market movements and of variations in the exchange rates between currencies. Past performance is not a guide to future returns and may not be repeated.
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