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Emerging markets caught in fallback

Emerging markets have suffered a sharp setback as investor fears grow over contagion from the US.

Emerging market equities held up well in July, with the MSCI emerging markets index returning 5.3 per cent compared with a 2.2 per cent fall in the MSCI world index.

But since its July 23 peak, the MSCI emerging market index has dropped by 13 per cent.

ABN Amro Asset Management strategist Maarten-Jan Bakkum says the realisation that credit market problems are spreading is forcing investors to reassess their exposure to risk.

He says: “In emerging markets, the correction is so sharp because for the last few years the market’s faith in an unswerving path towards robust glo-bal growth was overblown.”

Bakkum says concerns about US consumer demand falling are fuelling concerns that India and China will suffer a drop-off in exports and the reversal of risk appetite is resulting in currency trades being unwound, putting further pressure on emerging markets. He says that although short-term volatility is inevitable, the longer-term picture is positive.

Bakkum says: “The selling primarily reflects people reducing exposures and raising cash and is to a lesser extent related to emerging markets-centred problems.”

Hexam Capital fund manager Marina Akopian points to double-digit disposable income growth in Russia as an example of the strength of internal demand for goods and services in emerging markets which is lessening their past reliance on the US.

She says: “The growth in Russia is still phenomenal and it is no longer just a commo-dities play. “


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The silver lining

Amid the market volatility, a flight to quality is needed, as it is the experienced managers with a few grey hairs who will best be able to exploit the opportunities that undoubtedly exist in the markets.


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