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Emerging markets showed some initial resilience to the sub-prime turmoil and consequent decline in markets. They took longer to fall than developed markets and, when they did, it was generally not as sharp.

Although emerging market countries do not have direct exposure to sub-prime debt, some commentators argue that their ability to withstand the subsequent fallout is a sign of their increasing strength.

This resilience could be due in part to stronger domestic economies, less dependence on exports, more stable levels of inflation and current account surpluses. The development of domestic economies and trade that does not rely on the US and Europe is especially important.

The increasing wealth of emerging market populations is driving domestic demand and means there is less reliance on exports to the developed world. For some, the resilience demonstrated by emerging markets in June and July is testament to these economies pulling away from the US. Others say there is still a strong link.

Chartwell Investment Management investment research manager James Davies still regards emerging markets as a relatively volatile sector.

He says: “As a long-term play, the emerging market story continues to run. Although they are doing well, we still view emerging markets as a relatively volatile sector.”

Davies holds the JPM emerging markets fund and the Jupiter China fund in the AFI.

Killik & Co director of fund research Mick Gilligan says he is looking to increase in-house exposure to emerging markets. He says the region is as far away from sub-prime as you can be.

He says: “If you could invest in equities and be far away from sub-prime, emerging markets would be one of the key places to do that.”

But Dennehy Weller & Co managing director Brian Dennehy says emerging markets are still very much linked to what happens in the US economy. He says the reason emerging markets were not affected directly by the sub-prime problem is because they have no exposure to sub-prime debt.

Dennehy says: “Emerging markets are stronger than they were in 1997-98. They might be decoupling a bit from the US but US consumers still account for a large chunk of global GDP. Emerging markets cannot decouple to a great extent yet.”

Dennehy holds the Franklin Templeton global emerging markets and M&G global basics funds in his AFI portfolios.


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