Profile: Hermes’ Greenberg on why the emerging market rally won’t last

Gary Greeneberg of Hermes Investments, photographed at their offices in the City of London. Photo by Michael Walter/Troika

The recent rally in emerging markets is not here to stay, says Gary Greenberg, manager of the Hermes Global Emerging Markets fund. However, it is time for investors to start to ramp up their emerging market allocations ahead of a recovery, he says.

Recent weeks saw emerging markets rally, with the MSCI Emerging Markets index rising by more than 10 per cent before falling back down to a near 7 per cent rise in the year to date. In contrast, developed markets, as measured by the MSCI World index, saw a much more muted rise of near 2 per cent in the year to date.

The returns are a reversal of fortunes from last year, but Greenberg is not backing a full turnaround just yet. “I don’t think we’re in the safety of the port yet, I think we’re still out in the ocean. I wouldn’t be partying on deck yet,” he says.

“Whereas three years ago in May 2013 we thought it was a little early to worry about the Fed raising rates and emerging markets tanked, now we think it’s a little early to be thinking about Fed loosening or not tightening,” he says. “So my view is that this is the year the emerging markets stabilise versus developed markets.”

The head of emerging markets at Hermes Investment Management says that the three big headwinds that have been facing emerging markets since 2012 are now improving: the dollar, commodity prices and profitability.

Markets are already seeing a weakening dollar and stabilising commodity prices. However, the last piece of the puzzle to fall in is profitability, says Greenberg.

For emerging market corporate profitability to come in this year, one of the big issues that needs to be solved is overcapacity in some industries, particularly in China. For example the steel, glass and cement industries need to be trimmed down for profits to emerge, he says. However, profitability also relies on a number of other factors, including slower growth, a pick-up in wage growth and improved commodity prices.

It is this more sluggish movement on profitability that leads Greenberg to think this is the year to increase emerging market allocations, but that the rally will not come until 2018.

“I think our view is this year investors will get to a neutral if not slightly overweight position, and next year will go more fully overweight. Keeping their eyes open to the data of course,” he says. “I hope emerging markets can move from being a trade to being an investment. Right now, I’m saying it will probably make sense as a two to three year trade sometime this year.”

Greenberg is not as worried about China growth as some others: “Whatever you say about China, very few people think it’s shrinking as an economy and most people would agree it is growing more quickly than most other economies. Whether it’s growing 3.5 per cent or 6.5 per cent it is still growing,” he says.

However, one headwind for the country is the government’s intervention to stimulate the economy, which Greenberg brands “short-term gain for long-term pain” as it will only increase the country’s already high levels of indebtedness.

That concern has not stopped Greenberg finding many companies he thinks can grow their top lines and improve margins, from power tool manufacturers to luggage manufacturers and video surveillance companies.

While some emerging market fund managers steer clear of the A-share market and state-owned companies for fear of too much government involvement, Greenberg thinks it is “ridiculous” to be an emerging market manager and shun the entire A-share market.

Greenberg’s early years were spent working on the Acorn International fund, which was a small-cap focused fund, and this still influences his investment approach today.

“We travel around China a lot, we don’t just go to Hong Kong and sit in Shangri-La hotel and meet company managers for 45 minutes. We go to Shanghai, Shenzhen, Chengdu. I think that is the fun and romance of emerging market investing, to go into the hinterland and find companies,” he says.

Among his finds there is a heavy focus on technology, from pure technology firms to companies using the latest technology or factory automation to improve their business.

One example is Advantech, a Taiwanese firm that makes industrial PCs and makes up 2.5 per cent of the fund. Greenberg admits at the outset that it could sound boring. However, the firm has developed expertise in traffic management systems, with the Autoban in Germany being run using its systems.

Hikvision is another tech firm, which makes up 2 per cent of the portfolio. It is the number one firm for video surveillance and is working on developing systems so they can do facial recognition and body language recognition. Rather than recording individuals it is aiming to analyse an individual’s gait to tell you more about them, says Greenberg.

Outside of Asia, he is also invested in Hungarian pharmaceutical company Gedeon Richter, which makes up 2.47 per cent of the portfolio and is a top 10 position. The firm is developing the only drug in the market for endometriosis and is in phase three trials in the US, with a promising outlook, says Greenberg.


One area that is hindering the fund is its underweight to energy, which is largely due to Hermes’ focus on environmental, social and governance factors within its portfolios. Greenberg says this particular position is “hurting us right now” and a glance at the short-term performance shows the fund has not rallied as much as the markets.

It has returned 3.41 per cent in the first three months of the year, compared to 5.71 per cent for the MSCI Emerging Markets index. However, over three years the fund has delivered a 2.34 per cent return, compared to a 4.5 per cent loss for the benchmark.

Despite his focus on some of the small companies in the sector, Greenberg does not think this will present any capacity constraints for the fund. He runs around £2.2bn in the strategy, with two-thirds of that being institutional money and the remaining in retail funds. But he has set his sights on a £4bn to £5bn limit, under current conditions, for the strategy.

“Investors seem to be feeling that the US is fairly fully valued, Europe has reflected a lot of good news as well and the next place to invest is emerging markets but they are trying to time it as they don’t want to be too early.

“Maybe they have or will start a small position, but would like to play a three-year emerging market trade. Maybe some of the market rally we have seen in the past few weeks is part of that,” he says.


July 2010 Joined Hermes in the emerging markets team, to be head of emerging markets

2002 Founded Muse Capital, where he was chief investment officer, working there for five years

1999 Started at Goldman Sachs, where he became co-head of emerging market products at Goldman Sachs Asset Management, working in New York and London

1994 Started at Peregrine Asset Management as chief investment officer, spending four years at the firm

The Numbers

£593.4m Assets in the Hermes Global Emerging Markets fund

3.41% Return on the fund in the first three months of the year, against 5.71 per cent for the benchmark

2.5% Fund’s holding in Advantech, a Taiwanese company that makes traffic control systems, such as the Autoban in Germany

£4-5bn Capacity of the global emerging market strategy under current conditions, according to Greenberg