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The two-speed world

Last week was busy, both personally and with regard to those events likely to influence investor sentiment. The French and the Germans cobbled together a deal to keep the eurozone intact and while it may not have been all the market was looking for, it was enough to give shares a boost.

As cries of “Non!” and “Nein!” reverberated around Brussels, I was busy chairing the latest Cofunds round table on global emerging markets.

Some East European countries do count as emerging but the attention of most investors was concentrated across the Channel. However, last week was a pure Gem, if you will pardon the pun.

Alan Nesbit of First State, Henderson’s Chris Palmer and fund manager and partner at Hexam, Stuart Richards, opened a discussion that required no intervention from me. I gave up taking notes, such was the level of interest generated by these giants in their respective markets. It made me realise how much progress has been made in the field of managing money in the world’s developing nations.

It was that most perfect of debates, with plenty of areas of contention between the participants but some solid themes coming through to help guide those considering venturing into what is still considered a risky asset class.

The extent to which the country, or macro, scenario should be taken into account when developing strategy, rather than simply adopting a bottom-up stockpicking approach, was one area of disagreement. But all acknowledged that investors rated macro first, while managers paid more attention to stocks.

That emerging markets are no longer an esoteric investment, suitable only for the brave or foolhardy, came across clearly. But cheap they no longer are, even if prospects there remain significantly more exciting than in the debt-ridden countries of the developed world.
It made it all the more surprising to learn these funds represent no more than 3-4 per cent of net inflows to Cofunds, according to Michelle Woodburn, who manages fund group relations.

This two-speed world received another endorsement when, later the same day, I attended a presentation by economist Roger Bootle on behalf of the Julius Baer fund manager, Swiss & Global.

Roger has the knack of taking complex economic issues and translating them into everyday terms an enviable talent.

With the Merkel and Sarkozy show still running across the Channel, it was unsurprising that he took a downbeat approach to Europe’s economic prospects and to the likely survival of the eurozone. But his message was far from being all doom and gloom. His view on inflation (remember, he wrote a book not so very long ago entitled The Death of Inflation) accorded with that of Mervyn King. The peak, if not just past, is imminent and the fall will be dramatic.

Behind this forecast is a belief that commodity prices will turn down, perhaps dramatically. This will take some of the pressure off the hard-pressed consumer, which, in turn, should help economic growth. It was a curate’s egg summary of what we might expect good in parts, testing in others.

Residential property, for example, should retrench further. Commercial property, on the other hand, seems good value against Government bonds. There was a lot to take in. Conclusions on what to do as a consequence will have to wait.

Brian Tora is an associate with investment managers, JM Finn & Co



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