Investors should not neglect emerging markets

English version

Apart from a number of Exchange Traded Funds (ETF), the Swiss financial center offers only a few specialized products for emerging markets (EM) and even less know-how. But there is a clear investment case: Emerging markets are outperforming the G7 markets in terms of growth.

Expectations for two-year earnings growth in emerging markets are around 2.5 times higher than in developed markets at 20.5%. In addition, inflation is significantly lower and there is less pressure on corporate profit margins in emerging markets.

One would expect that at a time when companies in China, India, Brazil, South Africa, Vietnam or Saudi Arabia are growing rapidly and the center of gravity of the global economy is clearly shifting to these emerging powers, there would be a large supply of investment funds at Swiss banks . Ultimately, investors should be able to participate in this major shift.

Hardly any specialized offers for emerging markets

But the opposite is true, the trend is largely ignored. The vast majority of investment products in Switzerland are still concentrated in the old markets, ie the United States, Switzerland and Europe, with only a few funds specializing in Asia or the emerging markets.

Very few asset management mandates focus – beyond standard products such as ETFs – on emerging markets or offer specific exposure to themes such as Chinese AI stocks or products specializing in yuan or rupees. In Geneva, the private bank Pictet stands out, which has specialized in emerging markets (also in local currencies) for years and manages around $11 billion in EM bond funds and $3 billion in EM equity funds.

Apart from a few players who offer attractive EM products, the landscape in Switzerland is relatively barren. Long gone are the days from the late 1990s to around 2010 when emerging markets were in vogue in anticipation of the rise of China and the “commodities super cycle”.

Most private customer advisors at the banks generally consider these markets to be “too risky”. They advise clients to continue to focus on the “developed,” “stable,” and “liquid” markets that clients “better understand,” possibly also because of a “similar culture and values.”

The reasoning is that “it’s easier to explain to a customer what’s going on at IBM, Roche or Nestlé than what’s going on at Alibaba.” It is not easy to question this approach. For example, if you mention the real risks of a US debt situation spiraling out of control, the risks of long-term structural inflation in the West, or the collapse of part of the US banking system, you will get the stubborn reply: “Yes, but the US market is always still the best option.”

Fear of geopolitical risks

Most often, investors are offered “indirect exposure” to emerging markets through the stocks of Western multinationals operating there – but not through “real” emerging market representatives who are growing twice as fast. The underlying problem is a perceived geopolitical risk. With tensions escalating between the US and China, many banks and wealth managers seem concerned that client funds are not safe when invested with current or future US “enemies”. So it’s not just a question of expertise about emerging markets, but also a question of geopolitical barriers.

The fears of the financial sector are understandable. But the problem is that by overinvesting in the same old, mature markets, Western investors could miss out on the biggest opportunity of the century. They deserve access to the fastest growing companies in the most promising economies and they should not be put off by those markets. It’s basically about the freedom to invest and having access to opportunities everywhere, which historically the Swiss financial center has always offered its clients successfully.

Of course, some money managers will offer very rational and compelling reasons for their fixation on Western equities and their relative disinterest in emerging markets. Past performance is the most compelling argument. Emerging market equities have been flat for most of the past decade while the US market has rallied. That’s correct. No market has been able to compete with the US in the last decade. The S&P 500 has roughly tripled over the past decade, while the Nasdaq is up a good 600% at its peak.

The US stock market has been hit by the US Federal Reserve’s massive liquidity injections of no less than $6 trillion. $ overstimulated. This has also led to huge bubbles in the US venture capital and private equity markets. All in all, the US market attracted the fortunes of every major investor, family office and sovereign wealth fund in the world. The pull was so great that even the European and Swiss stock markets fared significantly worse than the US.

Is the pendulum swinging back to emerging markets?

But now a paradigm shift is taking place. The significant increase in inflation forced the Fed to raise interest rates to 5.25% and end its quantitative easing policy. The Fed’s balance sheet is over 8 trillion. $ still inflated, but the regime of easy money is over. Lo and behold, the S&P 500 has barely moved for about a year.

Investors can now turn their focus back to the emerging markets. The big question is whether the current economic boom in various emerging countries can also be reflected in the performance of their stock markets.

Investors are generally unsettled, especially given the geopolitical tensions with China. “The starting position is not clear at all,” says an expert. Exactly. But the best bets in financial markets are made when the outcome is unclear, not when a trend or theme is already evident. An investor would clearly make his bet now: “If there is one attractive trade, it would be short US private equity and long China.”

“The BRICS are overtaking the G7 economies,” says a private wealth manager in Geneva who serves clients from the Gulf region. “You definitely have to look at private equity in Asia and emerging markets in general, not just in the US.”

The bottom line is that all experts agree: despite the caution described above, the supply of EM products will definitely increase if these markets continue to grow and customer demand increases. One can therefore assume that unjustified fear will one day be overcome by justified greed.