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The odd decouple

The MSCI emerging markets benchmark has fallen by over 60 per cent this year as the sector shows it is not immune to the economic storm.

The falls have again led to arguments over the decoupling theory but many advisers remain confident over the long-term story for emerging markets.

Speaking last week at an emerging markets briefing, Hexam Capital Partners managing partner Bryan Collings maintained that emerging markets were experiencing temporary stresses but had decoupled at a fundamental level.

He explained: “Markets haven’t uncoupled. God help us if they uncouple, as it means international capital is not flowing properly. It needs to flow as it is the oil of the global engine but, on a fundamental basis, emerging markets have uncoupled.”

Chelsea Financial Services managing director Darius McDermott says the last six months have illustrated that when global markets suffer, all markets suffer, but he believes the majority of emerging markets funds are of sufficient size to cushion short-term blips. However, he believes there could be problems for smaller funds.

“Small funds that are not going to grow generally become ineffective from a cost point of view. I would not be surprised if the current climate was used to get rid of certain people in underperforming teams.”

Hargreaves Lansdown senior analyst Meera Patel is bullish on the long-term prospects for emerging markets but agrees that the rationalisation of smaller underperforming funds in the sector is likely.

She notes: “It does not make financial sense to keep funds going that are less than £5m-£10m in size because of the associated costs involved. You have to take into account the travelling involved as the analysts are based locally in the region.

“I would like to see some emerging markets funds close, especially the ones that are small and which perform poorly.”

Lloyd George’s emerging markets and global emerging markets smaller companies funds have a combined total of just over £3m in assets under management as at September 30.

The LG emerging markets fund was down by 52.4 per cent over the last 12 months to November against the MSCI emerging markets which was down by 43.7 per cent over the same period.

Patel says: “Normally, the performance of small funds can be good because they are easier to manage so you can get real growth but it is not been the case for LG unfortunately.”

Although recent performance figures show the capitalisation of small and big emerging equity funds has been savaged by the financial turmoil on the markets, fund manager of the Templeton emerging markets investment trust Mark Mobius says emerging markets are still burgeoning.

“Global growth will slow down of course but emerging markets have been growing five times faster than the developed countries. The growth story is very much intact and the fundamentals are still very good.”

The fund firm currently favours bargain-hunting in China, South Africa, Turkey, Brazil, India and Russia, and sees strong value in the consumer sector as people continue to buy in times of economic hardship, albeit at a lower level.

Mobius claims that the structural shift of capital sources away from the US also strengthens the long-term growth story for these markets. He adds: “The percentage of exports going to Europe and America from emerging markets have been coming down so we are beginning to see more diversified trade regimes. The US is not the be all and end all of these countries, they have other alternatives.”

Despite uncertainties for oil demand growth, Mobius is confident in the longer-term outlook for commodities and believes the current slump is temporary. A more serious threat, he warns, is the corporate governance problem that has emerged in Russia. He says: “You cannot make a bracket statement about all companies but there have been a few events recently where minority shareholders have not been treated very well.”

According to Patel, the majority of Russian funds offer exposure to bigger corporates such as Gazprom and Lukoil which maintain high accounting standards on a par with their international peers and corporate governance is not such a concern.

She says: “Corporate governance might be more of an issue for smaller Russian firms but a lot of these are not listed on the stockmarket. Most Russia funds offer exposure via investment in the bigger companies.”

In the current risk-averse climate, some investors have shied away from emerging markets but, for Premier Wealth Management managing director Adrian Shandley, the long-term growth story of these markets remains.

He says: “In the short term, I would be very wary of the smaller players and some of the geared investment trusts but in the long term you cannot argue with the emerging markets story.

“China is probably going to stall as it is suffering with labour unrest at the moment but in the long term it is still going to be the powerhouse of the global manufacturing base.”

Taking a long view, Patel says the risk-reward scale tilts in favour of emerging equities for those prepared to ride out the market waves. She says: “When things rise so fast you have got to expect some downturn in the short term but while this downturn could be for a couple of years, the long-term story for emerging markets is going to last two or three decades.”

McDermott also punts on the longer emerging markets story but for now prefers to hedge his bets with less risky asset plays. “In 10 to 15 years time, will emerging markets have a strong domestic play and be able to support their own stockmarkets? Potentially, but certainly not at the moment.”

More investment news and analysis at: www.moneymarketing.


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