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Lands of opportunity

May’s correction has shaken out nervous investors while opening up long-term global prospects

After more than three years of strong stockmarket gains, are there still opportunities for investors globally? Some challenges have emerged for the global economy in recent months after a strong run in share prices, with higher interest rates needed to cool off some overheated economies. This certainly highlighted the risk to investors in some emerging markets.

But such corrections are a healthy aspect of longer-term stockmarket progress, shaking out speculation and nervous investors. What it has done is offer opportunity for longer-term investors.

In China and India, annual growth should average more than 8 per cent a year over the medium term but recent growth rates running ahead of this have produced pockets of high inflation and rising asset prices. In India, for example, property prices in some cities more than doubled in 12 months. There has been an avalanche of new funds designed to open up access to the property markets in China and India to UK investors.

Yet the risks are clear, with the market setback in May hitting some emerging markets hard. The Turkish market was down by 40 per cent and India dropped by 30 per cent. Investors in specialist emerging market funds need strong nerves.

At the start of May, the Indian market valuation was rated at a 60 per cent premium to the emerging market average globally. Action taken in a number of emerging markets, in terms of raising interest rates and other restrictions on capital, are clearly designed to bring a degree of cooling. The effect has been to bring many individual share prices back to levels that offer value for longer-term investors.

Some cyclical areas such as commodities have already started to recover. Most metal prices saw a sharp sell-off, along with mining company shares, but the meltdown some feared did not happen. Clearly, there is significant investment bank and hedge fund activity in commodity markets but, remarkably, the slump in May did not trigger widespread liquidation or failure of funds. Indeed, the oil price saw very little weakness. Higher energy and metal prices should encourage oil and mining shares to move back to new highs. The opportunities for investors to correct underweight positions in these sectors may prove short-lived.

For global funds, the benchmark indices typically reflect the fact that the US stockmarket represents around half of global market capitalisation. Yet the US may now be an area of greater risk, given some signs of a housing slowdown. The prospect of further weakness in the dollar also adds to the potential for the US market to underperform. Instead, it is emerging markets that offer the growth prospects that investors are looking for.

Rather than try to predict the course of interest rates and allocate globally from the top down, it is possible to invest from the bottom up. Many niche funds around the world specialise in asset classes such as Japanese property or oil and gas in Russia. It has to be accepted that greater risk is involved but collecting together a group of such funds in a single portfolio does allow investors to benefit from the pockets of consistent global growth, with less dependence on the direction of the US consumer or interest rates.

The global recovery is four years old but share price progress has not been as steady. Once or twice each year, there have been sharp sell-offs. It is clear that risks to the US consumer have increased and a few asset classes may have run full cycle. But the industrialisation of many parts of the world, bringing economies such as China and India fully into the global economy, provides great opportunity.

Colin McLean is managing director of SVM Asset Management and manges the SVM global fund and SVM global opportunities fund


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