Skagen AS, a Norway-based investor that has outperformed funds run by Goldman Sachs Group Inc. and JPMorgan Chase & Co. (JPM) over the past decade, is telling clients to ignore Wall Street’s biggest banks and buy emerging markets.
Kristoffer Stensrud, the founder of Stavanger-based Skagen who manages the 50 billion-krone ($8 billion) Kon-Tiki A (STKONTI) emerging market fund, says a series of elections in the Middle East, Asia and Africa may provide a boost to markets in those regions as lawmakers turn to policies that underpin stability.
“There’s an election cycle starting this January in Egypt, India, Indonesia, Thailand and South Africa,” Stensrud said in an interview in Stavanger, on Norway’s southwest coast. “South Africa is interesting because of the social unrest over the past year. They may be more committed to statutory reforms and we might see a change of policy or a change in government.”
Kon-Tiki A has returned an annualized 15 percent over the past 10 years, the fifth best performance among 1,116 funds tracked by Bloomberg. It returned 5.5 percent over the past 12 months, measured in dollars, compared with a 6.7 percent loss for the benchmark MSCI Emerging Markets index, according to Skagen. Its biggest holdings are Hyundai Motor Co. (005380) andSamsung Electronics (005930) Co. Ltd.
Some of Wall Street’s biggest banks, including Goldman (GERIX), say that emerging market losses triggered last year by the U.S. Federal Reserve’s signals it might scale back stimulus will probably continue into this year.
Goldman last month told investors to cut allocations in developing nations by a third predicting a “significant underperformance” for stocks, bonds and currencies over the next 10 years. Goldman advised clients to lower their allocation to 6 percent from 9 percent, citing a lack of economic reforms to improve growth.
Developing economies still have a lot of potential to offer above-average returns as consumers there continue to invest in a higher standard of living, according to Stensrud.
“Cars in emerging markets are very interesting because penetration is low, demand is very high and affordability is rising sharply,” he said. “This gives these companies fantastic possibilities of growth.”
Kon-Tiki’s portfolio has 17.14 percent of its investments allocated to auto manufacturing in emerging-markets. These include Great Wall Motor Co. (2333) Ltd., a Chinese car manufacturer, and Mahindra & Mahindra Ltd. (MM), a maker of utility vehicles in India.
“Hyundai has clearly set their goal to be the world’s next Toyota, master of the universe, best manufacturing, highest quality, best design and affordability, highest level of productivity,” Stensrud said. “I think they will succeed.”
Emerging economies have benefited from a boom in credit and commodities over the past 15 years, a trend that some say may now have peaked. Morgan Stanley labeled Brazil, India, Indonesia, South Africa and Turkey as the “fragile five” in August because of their reliance on foreign capital.
Societe Generale SA takes a different view, according to its head of global emerging market strategy, Benoit Anne, who said that the “short-lived correction phase will soon be followed by a robust rally.”
“Emerging markets fundamentals are actually stronger now than they were in the past, and they are certainly stronger than developed-market countries, especially if you factor in the policy room for maneuver,” he said in an e-mailed reply to questions. “In addition to that, I would argue that valuation and technicals matter just as much as fundamentals at this juncture.”
Stensrud sees emerging economies breaking away from dependency on these cycles as they rely more on service based industries.
“Looking at traditional emerging markets you could be tempted to think that they used to be commodities driven, that they used to be cyclical, but their service sector is growing very fast,” he said. “You could say South Africa is a mining country, but if you look at South Africa’s stock exchange, it’s basically a services index. The service sector is growing fast in all emerging economies.”
Stensrud said they’re also pursuing investments in South Africa and in Chinese Internet companies.
“Two years ahead, we think we are in a huge paradigm shift globally to what you might call a non-material economy,” he said. That means “less and less goods and energy produce services, so we are looking a good deal into global e-commerce.” Bloomberg