Opalesque Industry Update:
… indiscriminate sell-off of emerging markets in 2008 has created a window of opportunity for investors …
Although Global Emerging Markets (GEMS) have suffered as the global economic environment continues to weaken, relative to developed markets they are outperforming, according to Baring Asset Management (Barings). This outperformance has been driven by a number of economic improvements, including the outlook for emerging fixed income markets, as local currency debt and corporate bond markets show recovery.
James Syme, manager of the Baring Global Emerging Markets Fund, explains: “As many developed economies in the Western world are in recession, the world’s less developed economies, the emerging markets, become increasingly important. Many of these economies learned painful lessons during the 1997 – 1999 crisis and as a result are much better equipped to deal with today’s global financial problems.
The emerging world can boast higher savings to GDP ratios compared to the developed world with much lower consumer indebtedness, current account surpluses, youthful populations and stronger banking systems.
“Although in 2008 the financial crisis led to sharp corrections in many emerging equity markets, we believe that this almost indiscriminate sell-off has created a window of opportunity for investors who are prepared to take a medium to long term view. Investors have the chance to build-up exposure at relatively depressed prices to areas that we still expect to exhibit strong earnings growth.”
Barings takes a defensive short-term stance on Global Emerging Markets given that these regions will continue to be affected by the global financial crisis. James Syme continues, “Emerging economies have significant exposure to the global economy, through energy and metal production, processing and technology and consumer product manufacturing. In the absence of any signs of recovery, we are cautious on the more economically-sensitive sectors, such as energy, materials, consumer discretionary, industrials and technology, and also on countries with significant exposure to these sectors. “
However, in the medium to longer-term Barings is confident that selected emerging markets offer strong domestic demand potential coupled with the capacity for pro-growth fiscal and monetary policies. James Syme explains: “In a world of slower global growth and tighter liquidity, economic growth is likely to be stronger in countries where policy can offset the impact of worsening global conditions. Fiscal and current account surpluses, large foreign exchange reserves, limited short-term foreign debt and high real interest rates are all characteristics we look for at a country level. State spending increases have already been announced in China and Russia, while monetary policy could be eased significantly in Brazil, Mexico and China.
“At the stock level, we expect outperformance from companies with strong cashflow and balance sheets and secure market positions in sectors less exposed to the global economic cycle. In this regard we like food and beverage production and retailing, telephony, media and consumer services such as insurance, education and healthcare provision along with selected consumer banking stocks.”
The Baring Global Emerging Markets Fund offers investors an attractive and convenient means of participating in the equity markets of the emerging economies of the world. The fund invests in a concentrated portfolio of 50 – 60 holdings, selected on a ‘Growth at Reasonable Price’ basis, seeking under-recognised growth opportunities that will deliver positive earnings surprises.
The Fund outperformed the MSCI Emerging Markets Index over 2008 and is ranked in the top quartile of the emerging markets universe over the last one, three and five years*.
*Source: All performance Morningstar as at 27.02.09. NAV per share basis in sterling with net income reinvested.