Gateways to Emerging Market Investing

Gateways to Emerging Market Investing View all 2 contributors

The emerging markets investment universe offers an increasingly wide array of entry points, but a discerning eye is key as countries diverge in opportunity. Here, Siguler Guff’s Ralph Jaeger and Newton’s Rob Marshall-Lee explore wider market trends.

Even for those investors who have been allocating to emerging markets (EM) for decades, it can seem a daunting prospect to reinvest after a period of choppy returns.

Now investors are starting to reassess their developed market exposure in an increasingly volatile environment, while considering the growth potential of emerging market economies

For Ralph Jaeger, managing director and portfolio manager of emerging markets private equity at Siguler Guff, certain developing markets are now presenting attractive entry points.

He says private equity used to be thought of as more of a beta play and the opportunity set was concentrated to just a few large markets, namely China, India and Brazil, but adds: “It has evolved over the past 10 years and become far more sophisticated across numerous markets with various investment strategies and different sector focuses.”

Jaeger notes EM publicly listed equities can be skewed towards just a few sectors —energy, utilities, financial services and materials – because they make up a large portion of indices. Conversely, investors’ exposure to healthcare, consumer or tech sectors can be limited, for the opposite reason. Yet the latter are the high-growth sectors he believes are among the most attractive in emerging market economies.

“In addition to the better breadth we believe private equity exposure can provide, valuations are generally lower than comparable publicly listed companies,” he adds.

It is this lower average valuation for EM private equity, compared with publicly listed counterparts, Jaeger believes is a big source of alpha versus listed equities right now.

Although there tends to be a valuation lag between public and private markets, Jaeger stresses that is not to say they are uncorrelated. He also admits private equity is unlikely to be the first asset class on investors’ radar when they think about allocating to EM, particularly if they have no allocation to private equity in developed markets.

But, in his view generally EM private equity investments can be complementary to public equity investments because of the relative ease and value in accessing index outliers such as health care, consumer and tech companies.

He adds investors need to “demand to get compensated for investing in private equity” where investments are typically held for much longer time periods. Jaeger suggests investors look for a premium of at least 500 basis points (bps) above the MSCI Emerging Markets index and at least 300bps over private equity returns in Europe and the U.S.


Selectivity and a fine-tooth comb are tools Rob Marshall-Lee, leader of Newton’s Asian and emerging equity team also believes are a prerequisite for public equity investing in the asset class. Marshall-Lee says there has been a great divergence in emerging market economies over the past few years and there are no signs of reversal.

“This is great news for fundamental, active investors but not so much for those who analyze emerging markets from a relative index perspective,” he says.

Marshall-Lee agrees with Jaeger on the diagnosis of emerging market equity indices in terms of their large weightings to commodity-exposed economies such as Russia, Brazil and South Africa but says investors willing to dig deeper and deviate from those benchmarks can benefit from far greater diversification.

Like Jaeger, he prefers consumerrelated sectors and those where growth is predicated on growing middle classes with higher disposable incomes — sectors such as healthcare and technology.

“When you have investment flows based on the shifting sentiment towards commodities, and related economies, it can impact the valuations of all equities in emerging markets — even those that are inherently attractive underlying investments.”


Much of 2016 has been characterized by the countries and sectors that performed badly in 2015 witnessing a reversal of fortunes. But Marshall-Lee does not believe those procyclical areas are necessarily sustainable long-term investments. “Even though high beta, lower quality stocks are bouncing first and fastest, we believe valuations look more attractive in opportunities where we see sustained strong profit growth.” 

Emerging markets as a whole appear to have de-rated substantially as evidenced by the Shiller P/E ratio but Marshall-Lee contends this measure of value is flawed as it is backward-looking and the future will not necessarily be a repeat of the past.

Over the next five years, he still believes India will be the best-performing market in hard currency terms. As a commodity importer with pent-up demand following a slowdown, he says the country is emerging from a painful credit cycle and has undertaken positive economic reforms. It is also a country with attractive demographics, hosts businesses with entrepreneurial spirit and features a relatively low level of government interference in listed equities.

When looking at China, he divorces headline rates of growth from company analysis. “China is rebalancing. While we are cautious on headline GDP growth, consumer wealth is growing consistently in high-single-digit to double-digit levels. So you have to look for good companies with strong brands or business franchises in the highest growth areas.

“The Chinese credit overhang, which many commentators are concerned by is very heavily slanted towards stateowned enterprises (SOEs) because banks have been lending mainly to them at the prompting of the state. You see a lot of capital misallocation in the Chinese government and SOEs but investing in independent companies that are self-funded through cash flows does hold some appeal.”

Jaeger believes China and certain countries in Latin America look attractive from a private equity point of view. In China, a transition towards a ‘new normal’ economy hinges on innovation, which he believes creates opportunities for venture capital investors.

Whether looking towards private equity or publicly listed companies in emerging markets, the message from both Jaeger and Marshall-Lee is consistent: developing economies can no longer be treated as a homogeneous group, if indeed they ever should have been.

A repeat of the mid-2000s boom is not expected but the managers see the potential for solid returns from specific parts of emerging markets over the next 5 to 10 years.


Main risks: Investing in foreign denominated and/or domiciled securities involves special risks, including changes in currency exchange rates, political, economic, and social instability, limited company information, differing auditing and legal standards, and less market liquidity. These risks generally are greater with emerging market countries. Equities are subject to market, market sector, market liquidity, issuer, and investment style risks to varying degrees.

The cyclically adjusted price-to-earnings ratio(CAPE), commonly known as Shiller P/E is a valuation measure usually applied to the U.S. S&P 500 equity market. It is defined as price divided by the average of ten years of earnings (moving average), adjusted for inflation. As such, it is principally used to assess likely future returns from equities over timescales of 10 to 20 years, with higher than average CAPE values implying lower than average long-term annual average returns. It is not intended as an indicator of impending market crashes, although high CAPE values have been associated with such events.

The MSCI Emerging Markets Index is an index created by Morgan Stanley Capital International (MSCI) designed to measure equity market performance in global emerging markets.

The MSCI World is a stock market index of 1,643 ‘world’ stocks. It is maintained by MSCI Inc., formerly Morgan Stanley Capital International, and is used as a common benchmark for ‘world’ or ‘global’ stock funds. The index includes a collection of stocks of all the developed markets in the world, as defined by MSCI.

The Institutional Brokers’ Estimate System (I/B/E/S) is a service. I/B/E/S began collecting earnings estimates for U.S. companies around 1976 and used the raw data to calculate statistical time series for each company. The data subsequently was used as the basis for articles in academic finance journals attempting to demonstrate that changes in consensus earnings estimates could identify opportunities to capture excess returns in subsequent periods. An investor cannot invest directly in any index.

BNY Mellon Investment Management is one of the world’s leading investment management organizations and one of the top U.S. wealth managers, encompassing BNY Mellon’s affiliated investment management firms, wealth management services and global distribution companies. BNY Mellon is the corporate brand for The Bank of New York Mellon Corporation.

BNY Mellon owns a 20% interest in Siguler Guff & Company, LP and certain related entities (including Siguler Guff Advisers, LLC).

Newton and/or the Newton Investment Management brand refers to the following group of affiliated companies: Newton Investment Management Limited, Newton Investment Management (North America) Limited (NIMNA Ltd) and Newton Investment Management (North America) LLC (NIMNA LLC). NIMNA LLC personnel are supervised persons of NIMNA Ltd and NIMNA LLC does not provide investment advice, all of which is conducted by NIMNA Ltd. NIMNA LLC and NIMNA Ltd are the only Newton companies to offer services in the U.S.

Views expressed are those of the manager(s) stated and do not reflect views of other managers or the firm overall. Views are current as of the date of this publication and subject to change. This information should not be construed as investment advice or recommendations for any particular investment. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. MBSC Securities Corporation is a subsidiary of The Bank of New York Mellon Corporation. 

© 2016 MBSC Securities Corporation, 225 Liberty St, 19th Fl., New York, NY 10281