Multi-managers keep an eye on developing markets

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The IMF cut its 2013 forecast for Chinese economic expansion last week

Despite a change in pace, the world’s fastest growing economies are still forging ahead but recent investment returns may be signalling an end of days for the easy money.

The primary engine of emerging markets, China is the obvious example of where concern has been most focused. Just last week, the IMF cut its 2013 forecast for Chinese economic expansion from 8 per cent to 7.75 per cent, citing a weak global economy and export prospects as the reasons for the adjustment.

The IMF’s move followed a number of downgrades. In May, Standard Chartered slashed its predicted GDP growth rate for China from 8.3 per cent to 7.7 per cent while Bank of America Merrill Lynch lowered its anticipated forecast from 8 per cent to 7.6 per cent.

In 2012 China’s economy grew by 7.8 per cent its slowest rate for 13 years and in the first three months of this year, it expanded at a lower-than-expected annual pace of 7.7 per cent.

Gary Potter, co-head of F&C’s multi-manager team, says: “Compared to developed nations emerging markets have become the market laggards in recent times. The broad emerging markets excluding the Asean territory have endured a macroeconomic slowdown.”

In the 12 months to 27 May, the MSCI Emerging Markets index achieved 22 per cent growth but the MSCI World index, housing developed nations embattled with sluggish GDP growth, managed to surge ahead by 35 per cent. And in the first quarter of 2013 alone, the MSCI World is up 10 per cent while the emerging markets index fell by 0.5 per cent.

For his part Scott Spencer, co-manager of the Aberdeen Multi-Manager Constellation Portfolio, remains positive about the long-term outlook for emerging markets. He says: “The structural story surrounding attractive demographics and debt profiles and a shift towards domestic-led demand still holds true. They will continue to be the drivers of the global growth engine.”

Potter adds: “Some emerging market indices have trebled in value over the past decade but the reality is dawning that these markets do not move up in a straight line. There is a culmination of things going on, including concerns that China and Brazil are enduring a slowdown. But no-one is saying that is it for emerging markets. They are simply maturing, and they are coming up against greater challenges. As developing nations grow, it is simply much harder for them to maintain such a pace.”

Emerging markets are still very much the region where the growth of the middle class populations is going to come from, particularly in Asia and Latin America asserts Algy Smith-Maxwell, co-manager of the Jupiter Merlin Worldwide portfolio. The latter, namely Brazil and Mexico, are the favoured regions for the Jupiter Merlin team which remains more cautious on Russia, the current cheapest of the emerging markets. 

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Smith-Maxwell cannot see a specific catalyst which is going to unlock that value. He says: “It could be put down to the fact that it is cheap due to corporate governance concerns but investors seem to be steering clear because they simply do not trust it.”

However Smith-Maxwell suggests another thesis in regards to developing nations. He points out that for China, in particular, “the tide is now going out” as a source for western companies to outsource their business to.

There have been reports in the media regarding a tightening of the gap between hourly wages in China and other parts of the world notably Mexico, with some declaring the latter now houses the cheaper labour force.

Smith-Maxwell says: “I think there is a very good chance that the USA is in fact a re-emerging market, as middle-America gets its act together. The world has changed, there are parts of the developed world that are re-emerging and it is all about how corporates can up their margins by reducing costs and yet the emerging market secular growth story is absolutely there, it is clear as daylight that is where the consumer of tomorrow is coming from.”

Spencer adds: “Economics and politics are the main challenges for emerging markets in 2013. Chinese economic growth is already experiencing a temporary slowdown as they shift from being an investment-led economy to one that is driven by the domestic consumer. Managing this shift will be challenging but it must be remembered that Chinese economic growth is still healthy when compared to that being produced in the developed markets. Political risk has always been present in emerging markets but is definitely improving in general.”

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Phil Scott is a contributor to Fund Strategy