Asia provides top prospects for emerging market gains
HAVING successfully run Baring’s Global Emerging Markets fund for five years, James Syme (below left) and Paul Wimborne (below right) are moving over to JO Hambro Capital Management (JOHCM) to start the Global Emerging Market Opportunities fund. It is being launched today and will be run on the premise that “top-down developments, normally at the country-level, cannot be ignored.” This belief is supported by monthly analyses of country weights, sectors and themes of all twenty-one MSCI emerging markets index member countries.
ASIAN GROWTH TO CONTINUE
The new fund is focused on emerging market countries where improved liquidity can drive growth. China and India both feature highly in their outlook, as do Malaysia, Thailand and Indonesia. Mark Williams, senior China economist at Capital Economics also expects continued and rapid growth in Asia. He says: “Catch-up growth still has a decade to run for most of Asia, open competitive markets are fostering innovation and trade linkages should also help” to drive growth. He believes emerging Asia is still a decade away from having to rethink its growth model.
Similarly, in its mid-year outlook the private banking house Coutts expects “the global recovery to remain centred on the new axis of growth in China, wider Asia and emerging markets in general.” Coutts also notes: “These markets still trade at a valuation discount to their developed peers, despite having faster-growing economies and higher returns on equity. The anticipated strengthening of local currencies is an additional source of potential returns.” Coutts expects an Asian shift in favour of equity returns for Asian and emerging markets, so is bullish on China, Taiwan and Singapore.
COUNTRIES TO AVOID
For Syme and Wimborne, not all emerging markets are equal. Their unashamedly top-down approach also picks out countries in which they simply won’t invest. Egypt, Peru and Hungary are currently off-limits because of their poor political situations, while South African miners and Mexican monopolies don’t look appealing. They think the Czech Republic and South Korea offer little growth and Turkey – although potentially a good long-term prospect – doesn’t look great in the short to medium-term. For Syme and Wimborne state-owned assets “doing national service” rule out most emerging market oil companies and Chinese and Korean power companies. They also see some profitable parties coming to an end, including “leveraged Indian banks, Brazil’s discretionary consumables and Chinese property.”
If investors look solely at worst-case scenarios they would invest in nothing but gold. Equally, given the instability in the Middle East and north Africa people are right to be wary of putting their money into an indiscriminate emerging market fund. One solution is the JOHCM Global Emerging Market Opportunities fund, which, by taking a macro perspective, aims to separate the wheat from the chaff.