Emerging markets fund managers and economists are split over the relative merits of the Latin Americ...
Emerging markets fund managers and economists are split over the relative merits of the Latin American market versus Asia.
The two areas make up the majority of the MSCI Emerging Markets Index with Asia representing 51.6% compared to 23.4% for Latin America but there are differing views about which offers the better bet.
Ashok Shah, head of emerging markets equities at Old Mutual Asset Managers, believes that views of the two regions, and consequently weightings, are biased by historical perspectives.
The target weighting for Old Mutual is underweight the index in emerging Asia, with a weighting of 94% of the index. For Latin America that target weighting is 111% of the index.
He says that some fund managers remain intractable in their belief that Latin America remains saddled with debt, has no savings culture, poor education, over-valued currencies, a heavy relience on natural commodities and is dependent on the US. Shah says this view no longer matches the reality of the Latin American market.
According to Shah both Mexico and Brazil offer outstanding opportunities going forward, however he is currently neutral on Mexico because its exports are expected to suffer as oil prices peak. In comparison, Shah says, emerging Asia remains riddled with structural problems and is tied closely to the success or failure of Japan.
He says: "There are deep-seated problems in Asia which people have very nicely ignored. The Asian economies have had 10 years of recession to solve their problems and have shown no sign of doing that. In the meantime the demographics keep getting worse and worse."
John Payne, a director in the emerging markets equity team at Baring Asset Management, says Barings is overweight Latin America and underweight Asia.
He agrees with Shah that Asia contains many economies where political cronyism and lack of structural reform continue such as Indonesia, Malaysia, Thailand and the Philippines. Barings is overweight Taiwan and Korea, both strong technology outsourcing and manufacturing plays. Payne says weightings in China will increase when liquidity and stock selection in the country improves.
In Latin America, Payne has a larger overweight position in Brazil because interest rates seem likely to fall further than they will in Mexico, which has a higher level of inflation. Valuations in Brazil are also more attractive than in Mexico, he says, although he adds he does not believe that falling oil prices will impact too heavily on Mexico's exports.
Michael Russell, economist at City of London, takes the opposite view and is overweighting emerging Asia more than he is overweighting Latin America.
Russell sees Asia as being less threatened by a slowdown in the US compared to Latin America because it relies more on trade with neighbouring countries.
He says that both regions have good numbers going forward, but emerging Asian countries have more competitive currencies than Latin America.
He adds that soft commodity prices are also more of a problem to Latin America than to Asia, which is still benefiting strongly from the outsourcing of manufacturing.
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