The underlying fundamentals of emerging markets are weathering the financial crisis and are set to deliver favourable returns in the long-term, says Batterymarch portfolio manager Ray Prasad.
Batterymarch is a subsidiary of asset manager Legg Mason and manages a total of approximately £3.55bn in emerging markets equities.
According to the firm’s fund manager Ray Prasad, the turbulence in global financial markets has brought emerging markets equities back to their historic valuation discount versus their developed equivalents. He says: “Correlations tend to increase during market downtrends and investors often develop a ‘get-me-out-of-here’ mentality at just the wrong time. This presents rare opportunities for savvy investors to scoop up stocks at bargain-basement prices.”
Prasad has increased emerging market exposure to the telecommunications and consumer-related sectors and believes domestic-related companies and infrastructure build-out are attractive. He says: “Many of them have sold off dramatically despite good fundamentals and strong earnings on the back of rising domestic incomes. Infrastructure build-out in emerging markets might even accelerate to counteract the global crisis.”
He intends to build exposure to banks and is cutting exposure to commodities and real estate on the grounds that demand in these segments has evaporated. He says: “Companies in the real estate sector in particular, have taken on substantial debt in order to win the growth competition and this has now come back to bite them in a deleveraged world.”
Prasad favours the financial and economic strength of China and Turkey but is bearish on commodity-related economies, such as Russia and Brazil. He says: “China has financial strength and flexibility in its policies on both the fiscal and monetary sides. This should help its economy stand up to the global slowdown. Over the years, Turkey’s economy has become more resilient to global shocks through positive steps by its central bank to curb inflation.”
Despite the convergence of short-term correlations, Prasad is confident in the long-term growth story of emerging markets. He says: “In the long term, future growth is likely to be less dependent on developed markets, as many of the emerging markets have young, fast-growing populations that are becoming better educated and better paid than previous generations.”