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Rally is worth the weight

Whisper it quietly but it appears that emerging markets are set to lead the comeback.

Although 2008 can best be described as an annus horribilis for emerging market investors, the past couple of months have been promising, with the average fund in the IMA emerging markets sector up by 27.2 per cent in the past three months.

Ignis Hexam global emerging markets fund manager Bryan Collings believes the worst of the economic storm has passed with emerging markets to spearhead the recovery.

Collings says improved data in both China and the US indicates this is more than a dead cat bounce. Hee urges caution in the aftermath of the rally but says structural factors such as lower household debt and developing capital markets are likely to result in emerging markets driving global growth in the next decade.

He says: “Despite this, emerging markets still trade at a 10 per cent discount to developed equities on 2009 earnings’ estimates and a 20 per cent discount on 2008 earnings. This gives plenty of scope for a re-rating of emerging markets that would drive further long-term outperformance.”

Jupiter multi-manager guru John Chatfeild-Roberts is also bullish on the market, having invested in Asia and the Latin America sector in a bid to take advantage of what he believes will be a sustained market rally.

Chatfeild-Roberts has cut cash exposure on the £2.3bn Merlin range to less than 5 per cent across all four funds.

He says: “It does not surprise us that the best- performing areas of the world have been among the emerging markets. Some of these sold off heavily in recent months, due to acute risk aversion rather than any significant changes to the long-term investment case. Emerging markets tend to be underpinned by strong domestic demand, a growing middle class and supportive demographics.

“There is also evidence of the earnings’ downgrade cycle bottoming out. We have begun to reinvest in specific geographical areas that we believe are structurally sound and where valuations have become extremely attractive. These include Latin America and Asia. We favour countries in these regions where national debt, household debt and inflation are under control.”

But there are warnings to be heeded. If investors cast their minds back to January, they would see the average fund in the IMA global emerging markets sector was down by 38 per cent over 12 months, with some funds down by over 50 per cent.

The Asia ex Japan sector fared little better, with the average fund down by 35.5 per cent.

Thames River co-head of multi-manager Robert Burdett says: “We are mildly overweight to emerging markets at the moment, partly because we are still seeing good cashflow. I think the key event was the G20 conference in London which saw the approval to fund less well financed emerging markets as it stopped fears of foreign currency being used up. We will probably continue to add to that overweight as long as we see strong flows coming in.”

Whitechurch Securities managing director Gavin Haynes says: “We are big fans as we are seeing a structural change in economic power over time. I would expect to see a growth portfolio over the long term have its exposure to emer- ging markets and the Far East rise from 10 to 30 per cent.”

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