Managed fund managers have turned to emerging markets to capture strong growth amid the global econo...
Managed fund managers have turned to emerging markets to capture strong growth amid the global economic recovery. They have identified the Pacific Rim and Latin America as the most promising markets, but warn they will be sensitive to increases in US interest rates.
Simon Melluish, fund manager at Gartmore, says the Gartmore Global Balanced Portfolio is overweight emerging markets against the benchmark, consisting of a combination of global bond and equity indices. For the equity component of his benchmark he uses the MSCI World Index, which has a zero allocation to emerging markets. The Gartmore fund has 1.5%-2% of assets invested in this area against the zero allocation in the index.
Melluish says Gartmore took this position on emerging markets six months ago, ahead of the expected rapid recovery in emerging economies, particularly Latin America.
The Gartmore Global Balanced Portfolio also overweight in the Far East, where there is an emphasis on investment in emerging Asian economies. The MSCI World Index allocates 2.4% into the Pacific Rim, whereas Gartmore has 3.5% invested in this area.
Melluish says: "When we look at asset allocation we look geographically on an interest rate, valuations and earnings basis."Many of these emerging markets are positive on all accounts. For example Brazil is positive in all areas, earnings have been revised upwards and we are still expecting some surprise, valuations are not crazy, and Latin America is one of the few areas where interest rates are on their way down rather than on their way up."
Melluish says he does not expect that the positive position on emerging markets are due to alter significantly during the year. He says the fund is well poised to capture growth in this area without being exposed to excessive risk.
Gordon Crofts, head of overseas equities at Scottish Life, is also overweight in Latin America and the Pacific Rim.
He says: "We moved overweight in these countries last year and going forward expect to maintain this position."
Scottish Life uses the Lipper Balanced Managed Fund benchmark. The allocation toward Latin America is 0.7% against the 0.2% benchmark and the Far East (ex Japan) allocation is 3.5% of the fund, against the 2.9% benchmark.
Crofts says within the allocation to emerging markets, he is more positive on some countries than others, based primarily on how sensitive they are to interest rate increases in the US.
In the Pacific Rim overall, Crofts says inflation is low, exports are booming and corporate earnings are growing. However on a more specific level, Crofts is positive on Taiwan, and neutral on Hong Kong.
He says: "The Pacific did well last year, yet company valuations are still very attractive. Taiwan particularly stands out as it has a strong economy and corporate earnings growth, while being less sensitive to interest rate increases in the US.
"However with the expected tightening in US interest rates over 2000, we expect that Hong Kong will be highly sensitive and this will be negative on the market. Also, with Malaysia becoming an index constituent of the MSCI, it is possible that money could be taken out of countries like Hong Kong and Singapore as investors increase their exposure to Malaysia. We expect substantial volatility in the market over this period."
Within Latin America, Crofts is most positive on Brazil and Mexico. He says although these markets are poised to benefit from strong global economic growth, these countries are however highly sensitive to US interest rate increases.
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