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Look to the long term

There has been a great deal of comment and discussion over the past year as to whether Asian and emerging markets have the economic strength and stamina to enable them to decouple from slowing Western and developed markets.

Asian and emerging markets have demonstrated exceptional economic growth in recent years and this had been reflected in stockmarket returns from these regions, which have comfortably outperformed Europe and the US.

At the forefront of this growth have been the Bric economies of Brazil, Russia, India and China, which have exploited their array of natural resources while also benefiting from increasing economic and political stability. The Bric countries may have captured many of the headlines but they are by no means the only Asian and emerging market economies to experience rapid development, with the rest of Latin America, Emerging Europe, the Middle East and Africa also taking huge strides forward.

A key part of the decoupling theory is based on the trade that now occurs between these markets, which it is hoped will help to offset declining export volumes to developed markets, as Western consumers struggle with falling asset values and high food and fuel prices.

For those that remain unconvinced about whether Asia and emerging markets can thrive against a background of slowing demand from Western economies, there have recently been a growing number of arguments. Among the most prominent has been the upward path of inflation, which has been rising globally and is most pronounced in Asian and emerging markets, many of which now face inflation rates in double digits. This situation has been exacerbated by the recent trend for countries, including India and China, to reduce or abandon fuel subsidies, which had previously kept prices artificially low. Leading economic indicators, including business and consumer confidence, have started to show initial signs of weakness and this has raised questions about whether economic expansion can be maintained.

In our view, decoupling is a side-issue when making investment decisions. We believe that Asian and emerging markets are increasingly significant elements of the world economy and their size, growth and increasing importance mean they demand consideration within the context of a wider portfolio. Financial markets are currently characterised by volatility and newsflow can be the catalyst for dramatic swings, making the issue of diversification perhaps more relevant than it has ever been.

In this environment, we believe no market, country or region should be discounted and that a volatile background can offer as many opportunities as it does potential pitfalls.

For investors trying to decide whether to invest in emerging markets, frontier markets, resources, soft commodities or just plain old bonds, equities and cash, we believe the answer is to keep your options open. Market conditions favour certain regions or asset classes at different times and this is why diversification can play a significant role not only in growing wealth but in preserving it as well.

We consider the best way to navigate through uncertain times is to look past theories and speculation and remain focused on building a portfolio that has the potential to capture the long-term opportunities that are too often overlooked in favour of the next big thing.

Cara MacGregor is manager of the HSBC open global return fund

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