Aberdeen’s Devan Kaloo on which emerging market will deliver the best returns to investors over the next decade.
Morningstar’s Emma Wall interviewed Kaloo in London.
1. What are the risks that are causing you the most concern at the moment?
With emerging markets, there have been three big problems: concerns about China and whether it was about to implode; the rise of the dollar and U.S. monetary policy; and earnings.
The one that probably concerns us the most currently is U.S. monetary policy. We’ve gone through a period since 2008 of extraordinary quantitative easing. But the efficacy of that monetary policy is reducing and voters in many developed countries are questioning its benefits— Brexit and the U.S. election represent in part this dissatisfaction. President Trump is keen to drive economic growth via fiscal measures— tax breaks and spending. How bond markets and the Federal Reserve respond will be a big issue for markets in 2017. The planned move from unorthodox monetary policy to unorthodox fiscal policy certainly bears some significant risks.
2. What do you think China has to do to return to favor with investors?
My biggest concern with China is the government intervenes too much. It intervenes in the pricing of capital and ultimately suppresses returns on capital. We think the risks of an economic downturn are overstated. We think ultimately the Chinese government will do what is required to keep growth, but at the expense of returns on capital.
3. Is India still a compelling market?
India represents one of the best long-term stories for emerging markets. India is going through what should be an extended cyclical recovery, which with the government’s reform agenda will sustain stronger economic growth for some time.
4. If you had to pick an emerging market for the best possible 10-year returns, which one would it be?
India would certainly be one of them.
5. Will we see a return to the 10% emerging-market equities growth a year that we saw before the financial crisis?
I started investing in emerging markets in 1994, and I think I’m now on to my 10th crisis. So, I’d steer clear of making any bold predictions of what your returns are. But the one thing I’d say is, first and foremost, in a low-growth, low-interest- rate, low-inflation world, returns should be lower. So, expecting the returns that we’ve seen post-2005 to, say, 2010 are very unlikely. That said, I do believe that you’d get better returns out of emerging markets relative to just about everything.
6. Do you think the effect of Brexit has been overstated?
The knock-on impact of Brexit has yet to be felt because it’s not fully understood what it actually means. These next couple of years, as they negotiate the exit from Europe, will be crucial to determining the long-term outlook for the U.K.