Wall Street or Emerging Markets?

Skagen AS, the Norwegian fund manager who has outperformed some of Wall Street’s biggest banks over the past decade, is urging clients to sit out the turmoil gripping developing nations.

Kristoffer Stensrud, whose 50 billion-krone ($8 billion) Kon-Tiki A (STKONTI) emerging market fund has returned an annualized 14 percent over the past 10 years, said there’s “nothing new really” in the recent turbulence, in an e-mailed reply to questions. He characterized the moves as “some contagion” in Latin America from Argentina, while reactions in the east remained “calm.”

“Emerging market economies hit by currency falls will probably be more competitive going forward,” according to 60-year-old Stensrud, who started Skagen in 1993. A lack of inflationary pressure from commodities will also be “positive,” giving a longer period with “low inflation and low interest rates in developed markets than generally perceived presently,” he said.

Emerging market currencies initially rose today, as the Turkish central bank raised rates after an emergency meeting. The rally later fizzled, and the South African rand also sank even after the country’s central bank boosted rates to protect the currency.

Taper Fallout

Sentiment toward emerging markets had started to sour last year after the U.S. Federal Reserve signaled it would scale back stimulus and as China’s economic growth showed signs of slowing. Investor anxiety this year erased more than $520 billion from emerging-market equities.

The MSCI Emerging Markets Index plunged to the lowest in more than four months this week as currencies from India to Turkey toBrazil fell. India’s central bank responded with a surprise rate increase after rupee depreciation threatened to fuel inflation.

The MSCI index gained as much as 1.4 percent today, the most since Nov. 18.

Stensrud, whose Kon-Tiki A fund was the eighth-best performer among 1,120 similar funds tracked by Bloomberg over the past decade, said earlier this month he had a positive view on emerging markets. That’s based on a bet that elections in the Middle East, Asia and Africa will lead to policies that underpin stability, he said.

The Kon-Tiki A fund has lost 6 percent this year, compared with a 5.4 percent loss for the MSCI EM index, in Norwegian currency, according to Skagen’s website.

Wall Street

Stensrud’s view contrasts with assumptions at some of Wall Street’s biggest banks, including Goldman Sachs Group Inc. (GS) The New York-based investment bank 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.

Some markets are resisting the sell-off. Egypt’s benchmark stock index has climbed to the highest level in almost four years on speculation a potential presidential bid from the nation’s top military commander will restore stability.

PT Manulife Asset Management, Indonesia’s second-largest money manager, predicted this week that the nation’s benchmark stock index would rally by as much as 20 percent by year-end as a weak rupiah boosts exports earnings and election spending supports consumer and media companies.

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. He also sees emerging economies breaking away from dependency on cycles as they rely more on service based industries. Bloomberg

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