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Digital Subscriptions > The Hedge Fund Journal > Issue 135 – Oct 2018 > KLS Sloane Robinson Emerging Markets Equity UCITS

KLS Sloane Robinson Emerging Markets Equity UCITS

Emerging markets veterans see selective value
Ed Butchart, CIO
CJ Morrell, Managing Executive

As emerging market equities in September 2018 touched the technical definition of a “bear market” – a 20% peak to trough decline – seasoned managers, Sloane Robinson, are still broadly constructive on the asset class and on their focused emerging market equity strategy portfolio.

Emerging market economies, corporate profits and equity markets can often follow different cycles to those in the US and developed markets.

If the US had its Great Recession between December 2007 and June 2009, “emerging market economies went from one of the strongest ever economic expansions in 2010, to one of the weakest ever in 2015 – which was a steeper slowdown in growth than after the global financial crisis. China was slowing, while other countries, like India and Indonesia, that had overheated on domestic credit booms, also needed to cool down; and Brazil suffered an outright recession. Some countries also needed to correct overvalued exchange rates. By 2016, many excesses had been purged, in terms of exchange rates and external deficits, and early 2016 marked a trough for EM equities,” recalls Sloane Robinson CIO and portfolio manager, Ed Butchart, who was an economist and emerging market strategist before managing money.

Economic growth cycles matter because Sloane Robinson has found that emerging markets’ nominal GDP growth defined in US Dollars – which was in decline and turned outright negative in 2015 – is a good correlator for their equity markets. “In 2011, return on equity in the mid-teens in emerging markets (based on consensus IBES earnings forecasts) was close to developed markets but it had dropped to 11% by early 2016, as sluggish growth – and weaker commodity prices – squeezed profit margins and pressured asset turnover,” points out Butchart.

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