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Pushing back frontiers

Emerging markets seem to have received more attention recently, due in no small part to their strong performance, but overall allocation remains lighter than perhaps it should be.

Speaking at a recent Cofunds conference in Harrogate, Old Broad Street Research research director Richard Romer-Lee said despite the fact that the industry has been good at designing a wide range of investment funds offering exposure to these regions, this has yet to feed through to the amounts invested there.

Romer-Lee said: “In 2000, 2.7 per cent of industry funds were in Asia ex Japan portfolios, rising to just 4.1 per cent by 2007.

“I do not think that the message is getting through. The choice out there is huge and I think this is a great opportunity and we would be nuts to ignore it.”

He acknowledged that emerging regions can be volatile but pointed out that they have come a long way in recent years and in some cases their economies can be considered better run than those in the West.

Aberdeen investment manager Mark Gordon-James said there is now a better macro environment in many emerging countries and better economic management than ever before, providing a base for steadier returns and lower volatility.

The opportunity for returns and growth remains high. Romer-Lee said: “If you had made a five-year investment in emerging markets on March 1, 2003 and achieved returns in line with the MSCI Emerging Markets index, your total return would have been 277 per cent – more than 30 per cent a year.” He said a 7,000 Isa investment in emerging markets in 2003 would be worth 26,392 today.

However, with more fund launches and talk of these regions sparking attention, inflows into emerging markets funds is on the rise. Cofunds says 19 per cent of new monies on its platform this year have gone into Asia ex Japan, global emerging markets and specialist single country funds.

Unsurprisingly, talk from fund managers invested in these regions is bullish. Barings portfolio manager Khiem Do says he now has 35 per cent of his own money in the Barings emerging fund range as well as a few positions in some of his competitors’ funds.

He and Gordon-James both admit that the region has been hit by the negative global environment but he sees this as a great time to build up positions. He says: “We have been in the panic zone for the past few months and I love to buy when there is panic.”

There remain several detractors that continue to make investors wary of emerging regions. One of these is geopolitical stability, especially considering what is happening in areas such as Africa and China, while another is the huge dependency on resources and commodities. A fall in this asset class could have a correspondingly high impact on the emerging markets that have grown strong on the back of the huge run in commodities.

Fidelity’s Charles Payne says there is no one big threat to the progress of these regions but a series of them, including the strong run in resources. He says: “You do not buy emerging markets as a play on commodities.”

However, he admits that the asset class has more than benefited these regions. “This run in commodities has gone on for some time and the amount of petro dollars into these regions has made a lifetime change for these countries. They have reinvested this money and are becoming less dependent on resources and so even if it was to collapse, it would not be as devastating as many think as they are on their own two feet,” he says.

This is the crux of Khiem’s attraction to the potential growth in areas such as China. He says the growth in that country is self-financed, which is key.

“The liquidity is absolutely enormous in China, it is just confidence that needs to come back,” says Khiem.

The local investor base in China is still small and therefore it relies on outside investors. However, it is growing and while there may not yet be a decoupling from the US from a stockmarket point of view, it certainly has happened from an economic stance. Khiem says the US has a massive funding problem and debt concerns while China does not. The savings rate in China has actually increased recently, moving from 43 to 47 per cent of disposable incomes.

JPMorgan New Europe joint fund manager Sonal Pandit highlights the fact that even regions such as Russia are conscious of too much reliance on resources. Russia has been building a reserve fund based on an oil price of $50 a barrel. Considering the price is now above $120, it means that the country has built a substantial pool to fall back on. This money is being spent on areas such as social welfare and infrastructure.

Infrastructure spend and increased consumption has been brought on by the rising wealth that recent activity in these areas has created, which again paints a brighter long-term picture of emerging regions.

Pandit says Russia has become one of the biggest and most important consumer markets in Europe, with real disposable income rising by 11 per cent a year since 2000. Consumption in New Europe still lags behind the West but convergence is aiding this process.

There remain concerns over emerging markets and the frontier markets, such as Africa or the Middle East, that groups are now launching products around. However, they insist that the long-term investment story cannot be ignored.

Romer-Lee says: “Emerging markets are experiencing long-term structural changes which many fund managers believe will greatly benefit their economies, companies, stockmarkets and, one would hope, the living standards in these countries.

“OBSR talks to fund managers on a daily basis and they generally comment that while there are significant risks and they expect short-term volatility, the long-term argument for investing in emerging markets remains intact.”

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