The chief investment officer of global equities funds management firm Magellan Financial Group, Hamish Douglass, has warned that investors in emerging markets are at risk of getting “poleaxed” in the next two years.
Douglass says his preference is to have zero allocation to emerging markets to avoid the “tail risk” of the quantitative easing (QE) unwind, which could see money rushing out of those regions and as long-term bond rates in the United States begin to tick up.
“The 10-year bond rate in America could hit 8 to 10 per cent,” he told an audience at the PortfolioConstruction Forum Markets Summit held in Sydney this week. “If you work through the maths and what could happen with the capital moving around the world under that scenario, you’ll get poleaxed in emerging markets. EM could be down 50 per cent to 70 per cent. Capital will leave in such a hurry.”
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Douglass was speaking on a panel of experts where participants’ views on the impact of US quantitative easing on emerging market equities landed on both the bear and the bull case, but were much more moderate than the Magellan chief’s views. The panel included strategists and economists from global investment firms including BlackRock, Invesco, PIMCO, JPMorgan Asset Management and Goldman Sachs Asset Management.
Indeed, Douglass is walking the walk. The Magellan Global Fund has zero allocation to Asia ex-Japan, zero allocation to Europe (ex-United Kingdom). The majority of the portfolio is allocated to North American (46.9 per cent) and “multinational” companies (46.1 per cent), according to the fund manager’s January report. Magellan defines multinational companies as those with greater than 50 per cent of revenues earned outside their home country.
“Developed market equities will deliver you decent returns,” he says. “Why stretch for the extra risk just because it looks a bit cheaper?”
Magellan Global’s top 10 holdings is a list mainly comprising large capitalised US-listed companies including eBay, DirecTV, Google, Lowe’s, Microsoft, Target, Tesco and Visa.
The consensus view of the PortfolioConstruction investment panel was that investment in emerging markets presented risks, but there were opportunities in the EM regions on a stock-specific basis, taking advantage of the bad news markets have already built into the valuations of stocks in those countries.
In contrast to Douglass’s message, market strategist and author of The Pain Report, Jonathan Pain, said the world could be on the verge of an immense opportunity to invest in countries in emerging markets where valuations are at all-time lows.
“There is some terrible news already built into those stocks,” he says.
While the panel’s consensus centred on the longer-term (five years-plus) investment opportunity for emerging markets, Douglass paints the near-term (two-year) time horizon as too risky to touch.
“I’d prefer not to own them [companies in emerging markets] and I’d suggest you don’t. The long term is fine and we’d prefer to be there in the long term,” he says.