GLOBAL - The Emerging Europe, Middle East and Africa (EMEA) investment region is set for a massive growth and currently 'perceived risk' still adds to the discount for stock purchases, Fidelity has suggested.
Main driving factors behind the growth of this market are a young population structure, very low but steadily increasing productivity levels, rising consumer appetite and the vastness of resources to be found in that region, according to the asset manager.
"It is a more volatile region and riskier region than, for example, western developed countries," said Nick Price, manager of Fidelity's newly-launched EMEA fund.
"But the real and perceived risk is included in the PE (price times earnings) discount you get and you are also compensated for the risk by a higher level of return," he added.
Price pointed out stocks from companies based in the region are growing faster than comparable stocks in developed countries.
He compared the South African telecom company Mobile telesystems OJSC to Vodafone which, according to Price, "operates in many risky jurisdictions and most of its growth comes from emerging markets anyway" but is not traded at a discount.
The biggest risk is managing the various volatile currencies, Price noted. He found a reasonable balance between domestic and exporting companies within a country to solve that problem.
There is currently also a low correlation to other markets, Fidelity stressed, because of the different market structure mainly reliant on resources including platinum and oil, albeit this is changing.
"The region will become less reliant on natural resources and the industry will become more service related," Price said.
This gradual adjustment to developed markets will mean an increase in correlation and a decrease in discounts on stock trading. According to Price, Poland is an example of where the fundamentals are okay but the multiples have moved up significantly.
"In other countries within the region, it might happen within the next years, or only in 20 years," the fund manager confirmed. "But by then investors will have earned a lot of money out of this neglected region."
Price's argument for an EMEA fund over a specific fund for any of these regions is the dominance of some markets.
"In a CEE fund, Russia would be dominating the market and within Russia it would mainly be Gazprom shares," he noted. Similarly, South Africa is dominating African markets.
No comments yet