At the New Year's Conference 2023, Portfolio Manager of SKAGEN Kon-Tiki Fredrik Bjelland was invited to talk about the opportunities he sees in emerging markets. After several years of pandemic and lockdowns in many emerging market countries, the outlook is becoming brighter since China introduced an easing of its zero-infection strategy before Christmas. Investors have been very aware of this, and emerging markets have delivered better returns than global markets so far this year, as measured by their respective indices.
Have emerging market companies really improved so much in such a short period of time, or is there another explanation for the positive developments? For Fredrik Bjelland, it is clear that the basic conditions are still very favourable for emerging markets, but this has long been the case. What's new now is that the narrative has changed.
"It is the perception of the future, not what actually lies ahead, that determines the price of the companies. Over the past 12 months, we have seen how the narrative around emerging markets has changed, as inflation and lower economic growth appeared on the radar," Fredrik said at the New Year's Conference.
Big discount in emerging markets
Historically, the valuation of emerging market companies has been lower than that of US companies in particular. But in the period from 2001 to 2010, the opposite was the case. Investors were looking for a safe haven after both the dot.com crisis and financial crisis and turned their attention to emerging markets. Since then, the appetite for emerging markets has waned, and US technology and growth companies were the winners until last year.
"Both valuations and the narrative are returning to what we saw in the early 2000s. But the emerging market index is still trading at a 60 percent discount to the US stock market," explained Fredrik.
He quoted investor legend Charlie Munger's words of wisdom when it comes to searching for the best investments: 'I have a simple rule for success in fishing. Fish where the fish are. You want to fish where the bargains are. That simple.'
"If you are looking for bargains, you have to look where prices are low and valuations can change for the better. Right now, there is an abundance of such opportunities in emerging markets. The only catch is that you have to dare to be contrarian to fish there," concluded Fredrik Bjelland at the New Year's Conference.