Little correlation between emerging market growth and returns, says M&G's Vaight

17 January 2012 | By Henry Brennan

The co-manager of the £548m M&G Global Emerging Markets fund has warned investors about the dangers of assuming GDP growth in emerging markets has not already been priced into markets, resulting in lower returns.

“There is little or no correlation between growth and stock market returns, and if markets are already pricing in growth, you will never see returns,” he says.

Russia and China, for example, demonstrated average annualised growth of 5% and nearly 10%, respectively, between 1994 and 2010. The relative stockmarket returns over this period were closer to negative 6% and 2%, however.

It is particularly countries with high levels of government involvement that follow this pattern, as GDP growth is prioritised over profitability.

High levels of government intervention often results in positives such as greater access to capital markets and liquidity, but at a cost for investors.

Gazprom, the world’s largest gas supplier, follows this example as it is “destroying value every day”, says Vaight.

Gazprom recently committed $5.6 billion (£3.6 billion) to the 2014 Sochi Winter Olympics at the request of its largest shareholder, the Russian government. The company’s return on capital has only exceeded the cost of capital twice annually since 2002.

Looking ahead, Vaight tips Vietnam and Bangladesh as the next boom emerging markets, fuelled by their potential for high-rate, low-cost manufacturing.

Vietnam is currently considered unsuitable for investment however, due to a combination of low visability, an undeveloped stock market and high levels of government intervention.

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