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Upbeat outlook for emerging markets
By Fiona Hamilton
Emerging markets gained such a strong following in the 2003 to 2007 bull market that it came as a shock when they were among the worst hit in 2008.
All the long-term arguments in their favour remain intact, such as their young and growing populations, improving educational and living standards, relatively low wages, limited consumer, corporate and government debt, and control of much of the world's oil and raw materials. But, despite all this, they clearly have not 'decoupled' from Western economies as some had hoped.
Most obviously, emerging markets have suffered from falling demand in developed countries for manufactured goods. They have also been hit by growing risk aversion among western investors, who have taken profits and repatriated the proceeds. Adding to their woes have been fears of unrest over soaring unemployment in countries with few, if any, safety nets.
On the positive side, China seems determined to prove that it can stimulate its domestic economy more successfully than anyone else, and this should help its neighbours. This gives credence to International Monetary Fund forecasts that emerging markets will achieve positive growth of around 3.5% in 2009, whereas the developed markets face a grimmer outlook.
The effects of the downturn are evident in the chart, as is the fact that some emerging market funds have fared better than others. Aberdeen Emerging Markets fund generally does relatively well in difficult conditions and it has been among the most resilient recently. Putting the case for a continuing exposure to emerging markets, Aberdeen suggests that, despite the superior economic fundamentals of developing countries, emerging markets fell further than those of the developed world in 2008, and this has left many companies trading on attractive valuations.
Joanne Irvine, who heads Aberdeen's Emerging Markets ex Asia team, says: "Aberdeen will continue to focus on companies with strong business models, robust balance sheets and experienced management, many of which have weathered previous downturns."
JPMorgan is similarly hopeful that the worst of the downturn is behind. However, JPM Emerging Markets Fund has had more in China than the Aberdeen fund, and fared worse in the downturn. Its 2008 results would have been even weaker, but for a good final quarter when it benefited from being overweight in South Africa and underweight in Russia and South Korea.
Austin Forey from JPMorgan says: "Virtually every measure of emerging market valuation has been pushed back to the 2002 levels that prevailed at the start of the multi-year surge, even though the secular improvements that underscored that surge (both macro and micro in our view) remain largely intact. The combination of aggressive policy stimulus, cheap valuations and increasingly beaten down earnings suggests that emerging market equity may well start 2009 with fear but give way to hope, and positive returns, as the year unfolds."
Those wanting a more cautiously positioned fund might prefer First State Global Emerging Markets. Nearly 40% of its portfolio is in consumer staple and consumer discretionary companies, which should benefit from efforts to bolster domestic demand in the emerging economies, whereas it has almost nothing in industrial metals and energy.
The exception is its 7% exposure to AngloGold Ashanti, which has been doing well from the strength in the gold price. "Developed world policymakers' lax attitude to the value of paper money suggests that owning gold could become even more crucial," says Jonathan Asante from First State.
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