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World-Beating Stocks Rally Has Two More Years to Terra Nova

(Bloomberg) -- Is there an end in sight to the surge in emerging market equities that’s pushed their performance ahead of developed markets?

Terra Nova Capital Advisors Ltd. says this year’s 29 percent advance that’s sent the MSCI Emerging Markets Index to its highest level since 2011 will endure for two more years as declining debt levels in developing economies leads to sustainable economic growth.

“I don’t think we have seen the end of the EM rally,” said Ami Kemppainen, Dubai-based managing partner at Terra Nova, which runs a $125-million fund focused on emerging and frontier markets. “We could see a couple of more years of nice performance. Perhaps the thing that will end it is a global correction in all equity prices.’’

World-Beating Stocks Rally Has Two More Years to Terra Nova

Developing-market equities have been a magnet for investors including Ashmore Group Plc and BNP Paribas Asset Management, who are betting on the resilience of domestic economies to better weather the expected increases in U.S. interest rates. And this week’s sell off in global equities hasn’t blown the rally off course, with the MSCI EM gauge set for its best year since 2009. The index gained 0.9 percent at 9:45 a.m. in London, halting a five-day decline.

Here are the highlights from Kemppainen’s interview in Karachi, where he attended the Bloomberg Pakistan Economic Forum.

What are the biggest risks for emerging-market investors?

  • “It’s always China. It’s the gorilla in the room and deserves to be that.”
  • “At least on paper, China has been able to show growth. It’s not an immediate risk, but it is still perhaps the number one risk for investors.”

How severely will the Fed hikes impact developing markets?

  • “Central banks will be gradual in their approach, supportive and logical for their economies and supportive for the global economy in general.”
  • “So, given the expectation that the move will be tempered and gradual, I don’t think we will see great effects on outflows or valuation.”

What is your investment strategy?

  • “We invest in areas that are under appreciated. Investors seem to over-appreciate consumer businesses, which they view as stable and secure. But that’s like going into fixed income when you could be in equities all the time.”
  • The fund has invested in Malaysian electronics that are fairly smaller and unknown compared with those in Taiwan or South Korea. Its top holding in Pakistan is Adamjee Insurance Co., which may benefit from growing automobile sales, Kemppainen said.

What is your outlook for frontier markets and Pakistan?

  • “With future upgrades, the countries that would join the frontier index are not going to be as large or liquid as those that have left. It seems to me that many managers have started looking at frontier-emerging rather than just frontier as the solution for that”
  • For Pakistan, “the long-term story definitely hasn’t gone anywhere. We dropped our holdings to 9 percent from 25 percent we had a couple of years ago. I see that reversing once the political situation is clear and we get clarity on the currency devaluation in second half of next year.”

In which markets do you see value? 

  • “Malaysia and Turkey are the biggest holdings this year and comfortable going forward for the short and the medium term.”
  • “Turkey is always a question mark, but then again we’ve found value in some stocks.”

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