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Final frontier

John Kenchington says more exotic regions could lead emerging markets over the coming year

Emerging markets will continue to lead global market growth over the long term but investors should consider delving into more exotic regions in 2011 for the chance of good returns, experts say.

Some believe traditional Bric emerging nations of Brazil, Russia, India and China are losing their appeal and frontier markets in regions such as Africa, Asia and Latin America are more likely to take off over the next 12 months.

Henderson Global Investors fund of funds manager Craig Heron says two factors make the Bric emerging markets look less appealing this year.

He says: “The rate of growth seen in these nations and their currency regions is resulting in inflation pressure and we are seeing that in a number of emerging markets. So you are seeing interest rate rises and, in a number of emerging markets, the introduction of capital controls as well.

“Also, while these emerging markets are tightening policy, we think the returns are going to be a bit below developed markets. The valuation support is not that strong in some sectors.”

Heron says frontier markets are yet to suffer inflationary and valuation pressures.

He and co-manager Mark Harris have started adding to their overweight stance on frontier markets by buying into African and Vietnamese equities. They have also taken a position in the Franklin Mena fund, which targets the Middle East and North Africa.

Hargreaves Lansdown senior analyst Meera Patel agrees that emerging markets could be set for volatility, especially in “fully valued” areas such as consumer sectors in China and India.

She recommends broad-based emerging funds for first-time emerging investors and favours Angus Tulloch’s £5.5bn First State Asia Pacific leaders fund and the £2.2bn Aberdeen emerging markets fund.

But she also agrees that frontier markets could be set to take off.

She says: “The frontiers are looking interesting. There is not a lot of information on these markets but we saw a couple of African funds launch last year and they could be where a lot of the money starts going this year.”

Frontier fund launches in 2010 included the BlackRock frontiers investment trust, which raised £94.7m in December. In August, Castlestone Management launched a fund targeting the so-called next 11 nations of Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, Philippines, Turkey and Vietnam.

Alquity Investment Management set up a Luxemburg-based fund investing in Africa within a socially responsible investment framework in September.

Asset managers also ramped up risk levels with single-country fund launches as Insynergy offered an India fund, Fidelity opened a China special situations investment trust and JP Morgan launched a Brazil fund.

Barings also launched a Mena fund earlier in 2010.

Schroders joined the party this week with the launch of a Luxemburg-based frontier markets fund that will be co-managed by Allan Conway and Rami Sidani.

But while the frontier markets are the focus for emerging market investors, BlackRock’s £580m UK income fund manager Nick McLeod-Clarke believes investors can look closer to home to benefit from emerging growth.

He says he will be targeting UK companies he thinks will benefit from emerging market development this year while also providing the high-yield levels associated with the UK’s mature stockmarket.

He says: “We expect continued growth in emerging economies during 2011. The UK stockmarket has a significant level of international exposure with around 80 per cent of FTSE 100 turnover coming from overseas.

“A perceptive way to gain exposure to UK companies likely to benefit from these trends is through an income fund as this provides the opportunity for a balance of yield and capital growth.”

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