A breed of investors who are not swayed by national stereotypes are set to breathe new life into emerging markets, claims a top fund manager.
Templeton emerging markets lead manager Mark Mobius believes that retail investors are finally prepared make the plunge into developing markets as diverse as Brazil, China, Taiwan, Russia, Turkey and Poland because the concerns surrounding many nations have disappeared.
Mobius joined Franklin Templeton in 1987 and has become recognised as the leading voice in the emerging markets sector. His £7.8m fund only launched in the UK in March 2004.
It has been a challenging year for emerging markets investors. Many managers have gone underweight in Asian equities in the belief that it is not an investment environment for the faint-hearted while investments in South America have proved volatile.
One aspect that is lifting the expectations of managers is growth of trade between emerging markets with, for example, South Korea now trading more with China than the US.
The expansion of the European Union is adding a new dimension as fund managers look increasingly to Poland and the Czech Republic while trying to predict whether potential EU status would be beneficial for the growing industrial powerhouse of Turkey.
What managers are looking for is continuity, says Mobius. They need to know that political and business regimes are going to stay in place long enough to make investment a worthwhile opportunity. He thinks this brings reassurance to investors who, despite being appreciative of the risks, need to know that their money will not disappear into a country where the economy collapses.
The Jupiter emerging markets fund is a popular choice for many IFAs because it has a 40 per cent exposure to Russia, where the equity market has doubled in two years. This development has been matched by the return of overseas capital, with £20bn of equity investment flowing into the country last year from Russians.
Mobius points out that while Russia remains a good opportunity, investment must be tempered with an element of caution over the management structures of many equities.
Chelsea Financial Services managing director Darius McDermott only recommends emerging markets as a high-risk long-term strategy. He believes the Templeton fund along with the recently launched £22.8m Lincoln emerging markets and £347.5m First State global emerging markets fund are best bets for investment in the sector.
According to Standard & Poor's, the Lincoln fund is the top-performing fund over the past three months, having returned 12.2 per cent. It aims to provide low volatility and high returns by investing in markets that will give sustained capital growth. Its benchmark is the MSCI emerging markets free index. The fund is managed by fund firm Delaware and lead manager Bob Askester places emphasis on economic conditions within countries.
Specialist investment adviers are keen on this strategy since there are a range of geopolitical conditions within emerging markets that can hit the short-term performance of a company. An example can be seen in India, where the result of this year's elections and Sonia Gandhi's refusal to become prime minister caused the Bombay Stock Exchange Sensitive index, or Sensex, to fall by its biggest one-day margin of 11 per cent to 4.505 before rising to over 5,000 a week later.
McDermott says: “Investing in emerging markets is nothing other than a high risk strategy. You have to be careful because there are a number of geopolitical factors that can have an effect outside the normal investment considerations. Take a look at Argentina – people were investing there quite heavily and all of a sudden the currency becomes devalued and they have a rapid change of presidents.
“It is high risk but investors are more alert to the climate in certain countries and corporate governance is improving.”
Indeed, it is improved corporate governance that has led to the growth of the sector. Emerging markets fund managers are having an increasing say on the boards of the companies they invest in.
Mobius believes that emerging markets bring scope. The wide array of equities means that managers can examine sector, nation, currency, region and corporate governance before selecting only one or two stocks in each country.
However, emerging markets cannot emerge for ever. Mobius admits that it will be difficult to hang on to a number of countries that have seen staggering rates of growth in the past decade. He has already applied pressure to keep South Korea in the emerging sector.
Mobius says: “The institutional money from the US and to a lesser extent from the UK has become disaffected with the investment climate in their own countries. They have started to look elsewhere.
“It is not that hard to persuade retail investors to look to emerging markets since they too have become disheartened with what has happened in their home market.
“The world is getting smaller and investors are better informed about the opportunities that have been presented with emerging markets.”