The global investment environment seems to be improving, and active investment managers may benefit from rising markets and be able to mitigate the accompanying volatility, says Henk Roos, a senior fund analyst at PSG Wealth.
Active management is where a manager makes specific investments with the goal of outperforming an investment benchmark index, whereas passive managers’ portfolios passively track market indices.
Roos says that, over the past eight years, investors have become accustomed to the benefits of quantitative easing (QE) by the central banks of developed countries.
Essentially, QE has involved injecting cash into stagnant economies and keeping lending rates very low in an effort to get economies working again.
However, recently, Roos says that central banks are looking at normalising lending rates and tapering off QE as the global economy continues to recover.
For about seven years, passive managers have benefited from the economic environment shaped by QE, while active managers have had an uphill battle. However, a changing macro-economic backdrop suggests that active management could soon see a lift, Roos says. Against the changing backdrop, active managers may be able to add value for investors in rising markets, while dampening volatility.
Leading indicators are showing that global economic growth is on the rise. Most major markets, including emerging markets, have seen an increase in the estimates of their 12-month forward corporate earnings. This means there are equity investment opportunities in developed and emerging markets that active managers may be positioned to exploit.
A positive sign is the divergence in inflation rates between developed-market and emerging-market economies. Marcel Roos, another fund analyst at PSG, says there has been a steady increase in inflation expectations for developed markets. “At the same time, inflation rates in emerging markets are falling, and the gap between the two is now at its lowest level in at least 20 years.
“Falling inflation in emerging markets and the rising inflation in developed markets are adding to the appeal of emerging-market investments. This causes an inflow of foreign funds into emerging markets and, in turn, protection against currency devaluations.”
Emerging-market stocks comprise about 11% of the MSCI All Country World Index.
In emerging markets, the increasing population, and the move towards higher consumption and higher value-added industries, such as technology, should provide investors with opportunities.
Investment risk is lower because inflation is lower, and because there are fewer risks to emerging-market currencies.
“This presents good-quality active managers with opportunities to increase emerging-market exposure, to capture the upside potential in these markets,” Marcel Roos says.