Thursday, 05 November 2009 16:48    PDF Print E-mail
Emerging market funds ready for a downturn, investors are warned

China has been booming, bringing good returns to emerging markets portfolios. But can this continue? China has been booming, bringing good returns to emerging markets portfolios. But can this continue?

Investors are flocking to emerging markets with the anticipation of hefty returns, though industry experts doubt that the performance will last.

Those with investments in emerging markets have had a bumpy ride but enjoyed a good past six months. They are warned, however, that another downturn is in store.

Emerging market funds suffered badly during the recession, but in the past six months they have come back strongly and are the top performing sector, with an average increase of 40%. They have also produced the best long-term returns.

The top-performing fund over the past five years is Aberdeen Emerging Markets, with a gain of 177%. This is most heavily invested in Brazil, China and India which together account for 42% of the portfolio.

Its manager, Devan Kaloo, is upbeat over the long-term prospects for emerging markets, but cautions that they have run ahead of earnings growth, while economic conditions remain weak. “Against this backdrop, a pullback or period of consolidation would be healthy and overdue,” he says.

Angus Tulloch, is much more positive about the long-term prospects, as favorable demographic trends in countries such as India should contribute to a major expansion of consumer markets. Angus Tulloch, is much more positive about the long-term prospects, as favorable demographic trends in countries such as India should contribute to a major expansion of consumer markets.

Another fund with a superb track record is First State Asia Pacific Leaders, where the manager, Angus Tulloch, has achieved a return of 148% in the past five years. At the moment, however, he is extremely cautious and believes there is little upside at current valuations.

“The markets are discounting a rapid return to the favorable conditions of strong global economic growth, but they are not anticipating the possibility of a substantial pick-up in inflation as a result of quantitative easing,” he says. “This
suggests a further correction seems likely.”

Tulloch is much more positive about the long-term prospects, as favorable demographic trends in countries such as India should contribute to a major expansion of consumer markets, while the huge pool of deposits in the Chinese banking system should be supportive of equity valuations as the funds are gradually invested.

“We are fundamental stock-pickers and are overweight in the consumer staples sector, which offers companies that can grow earnings without relying on the global growth environment,” he says. “We are also overweight in utilities and telecom services, where companies have relatively predictable earnings.”

The safest way to benefit from the long-term prospects of these sorts of funds, without being caught out by the volatility, is to set up a regular investment plan so as to drip-feed a small amount of money in each month.

Nick Sudbury. Miami
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