BlackRock Inc.’s Sam Vecht says investors are following the herd in selling emerging markets to invest in the most-developed economies, a strategy that has historically yielded “underwhelming” results.
Investors “are selling emerging markets which have very low valuations, significant dividend yields but have underperformed in recent times,” Vecht, London-based manager at BlackRock Emerging Europe Trust Plc, said in e-mailed comments yesterday. In exchange, they’re buying assets in the developed world, “which has relatively high valuations, potentially limited long-term earnings growth and where markets have just gone up rather fast.”
While investors should be looking for underpriced assets, following the crowd means that “in practice, investors often buy high and sell low,” Vecht said. BlackRock, whose $4.3 trillion under management makes it the world’s biggest money manager, is turning more bullish on markets including Turkey, citing the allure of factors from low stock valuations to higher interest rates.
Vecht’s call comes as the Federal Reserve’s decision to withdraw monetary stimulus threatens inflows to risker assets, pushing investors back to the relative safety of the U.S. and other developed markets. Investors have withdrawn a net $13.5 billion from U.S. exchange-traded funds that invest in emerging markets this year, including $1.3 billion in the five days to March 17, according to data compiled by Bloomberg.
Turkey’s main stock index, the BIST 100, has fallen 36 percent in dollar terms in the past 12 months, the most worldwide, as tapering concerns coincided with anti-government protests and a political crisis spurred by a corruption investigation. The Standard and Poor’s 500 Index is up 21 percent over the same period.
The MCSI Emerging Markets Index has dropped 7.9 percent in the last 12 months, while the MSCI World Index gained 16 percent over the same period. To boost its weakening currency and defend against outflows, Turkey more than doubled its one-week repo rate to 10 percent in an emergency meeting on Jan. 29, following an Indian rate increase to 8 percent, while Brazil has raised its target rate in steps to 10.75 percent from 7.25 percent over the past year.
“For several years we had been relatively bearish on emerging markets in general and Turkey in particular, but in the last few months we have turned more bullish,” Vecht said. Investors getting out of emerging markets now risk repeating the mistakes of 2009 to 2011, when many were too late to share in the biggest gains, he said.
Paul McNamara, a London-based fund manager at GAM UK Ltd., said some fund managers, who failed to see the global financial crisis sparked by the failure of Lehman Brothers Inc. in 2008, are probably being overly cautious now.
“Everyone who missed the 2008 crash wants to call the next one, and emerging markets are the new-found object of expertise,” McNamara said in e-mailed comments yesterday. “Claims of a global crisis are overstated.”
Turkey’s banking stocks fell below book value for the first time in five years in December, spurring BlackRock to go overweight in financial stocks in the country. The banking index has dropped 25 percent in dollar terms since Dec. 1.
“Stock prices have fallen and now look cheap on absolute, and very cheap on a relative basis to the developed world,” Vecht said.