Growth awaits despite market dips

Global Emerging Markets delivered strong results for investors in the wake of the subprime crisis and, despite market falls this year, the sector promises strong growth in the long term.

Interest in Global Emerging Markets was bolstered in 2007 with the sector producing returns of 32.04%, according to the Investment Management Association (IMA). The biggest beneficiaries were India, whose benchmark BSE index rose 47.15%, and China, with the Shanghai Composite index showing gains of 99.63%.

The resilience of these markets, as the impact of the subprime crisis in America hit developed markets in the summer of 2007, increased their popularity. It strengthened the view that emerging markets could decouple from the developed markets and avoid a global slowdown.

The beginning of 2008, however, has shown that some proponents of the decoupling theory may have overstated their case. From January 1 the IMA Global Emerging Market index has fallen 6.76% with the Shanghai Composite shedding 14.71% and the BSE losing 11.48%.

The Adviser Fund Index (AFI) panellists seemed to share the positive outlook on emerging markets adding the Fidelity South East Asia, Gartmore Emerging Markets Opportunities and Axa Framlington Emerging Markets funds to their portfolios in the November rebalancing.

Hilary Coghill, investment director at City Asset Management, says what we have seen so far in 2008 has not affected her long-term view of the potential for emerging market growth.

“I think you have to take a slightly longer-term perspective,” she says. “You would still have been better off investing in emerging markets from January 2007 than you would investing in developed economies.”

Coghill does not accept the notion of decoupling, however, but she sees the prospects for developing economies during a global slowdown as being relatively better than they have been historically.

“I don’t think that markets in Asia will decouple from the US but they are much less connected than they were in the past, like during the [1997-1998] Asia crisis.”

“If you are prepared to take a five to 10-year view that’s when you’ll see the growth that you won’t get in developed economies,” says Coghill.

The weakness in Asian markets may, therefore, present buying opportunities for investors. The Gartmore China Opportunities fund was the best performing fund of 2007 producing returns of 66.6% and accounted for a fifth of sales on TD Waterhouse’s fund supermarket.

The problem, says Meera Patel, senior analyst at Hargreaves Lansdown, is that many investors started to see opportunities in emerging markets late.

“There tends to be a lag with private investors,” Patel says. “They climb onto the bandwagon rather late.”

The “considerable correction” that the Chinese market suffered was due after the rapid gains of 2007, she says. Many investors who bought into China towards the end of last year will have made significant losses in the market turmoil.

The Merrill Lynch global fund manager survey for February shows a net 46% of managers seeing global emerging markets as their favourite region compared with 62% in December.

The growing concern about the ability of these markets to weather a global slowdown has caused some investors to start pulling their money out, says Sam Sibley, an investment manager at Beckett Asset Management and AFI panellist. “Perhaps retail investors have panicked a bit and so some of the hot money has left the sector,” she says.

Some investors have become concerned with news that large financial institutions have reined back their expectations for growth in emerging markets in 2008. Sibley says that despite this the economies of these countries are still growing faster than developed economies.

“One of the ways that we like to play emerging markets is looking at funds like the MG Global Basics fund who can benefit from infrastructure spending and commodities prices,” says Sibley.

“We use funds with a record of good stockpicking. In our AFI portfolios, for instance, we have the JPM Emerging Markets fund because we like Austin Forey, the fund manager, and because the fund can use JP Morgan’s extensive resources.”

For those who have resisted the temptation to sell, Patel says Hargreaves Lansdown sees opportunities appearing after the extremes of volatility start to ease.

“Our view is that even if people have bought into China this year and have suffered losses they are likely to make money over the longer term,” she says.

On a 12-month view managers have not changed their overall asset allocation to emerging markets, according to the Merrill Lynch survey. A net 17% were overweight emerging markets compared with other regions in February – the same figure as December. This, Sibley says, is because unlike private investors, sentiment towards emerging markets has not changed among professional investors.

With the levels of volatility experienced since the start of the year it has become more difficult to predict market movements. The fundamentals of developing markets remain strong, says Patel, which means that the focus should be on long-term growth rather than on trying to time investments.

The Adviser Fund Index series comprises an Aggressive, Balanced and Cautious index each tracking the performance of portfolio recommendations from a panel of 19 investment advisers. For each risk profile, all panellists specify a weighted portfolio of up to 10 funds from the authorised UK unit trust and Oeic universe that, when aggregated, define the constituents and weightings of the three AFIs (see