Asia is more appealing to emerging market fund managers than Latin America, although uneven conditio...
Asia is more appealing to emerging market fund managers than Latin America, although uneven conditions mean both remain highly stock specific.
Asia comprises 57% of the benchmark MSCI Emerging Market Free Index, while Latin America is only 17%. It is no surprise, therefore, managers say it is easier to find investable stocks in Asia. Asian equities are also said to be closer to recovery than Latin America, as their pain started earlier.
Giles Neville, emerging markets product manager at Schroders, says: 'Asia has already had its really tough period, which started with the 1997 crisis in Thailand and culminated in 1999.
'Companies that wanted to survive in a listed or public form have had to become more disciplined about how they use and source their capital, and have been more focused on returns on equity as a result.'
JP Morgan Fleming Emerging Markets investment trust manager Austin Forey says the outperformance of exporting stocks in Asia during the late 1990s, followed by outperformance by domestic plays during the downturn in the US, has become much more evenly balanced between the two sectors.
'There are not as many strong themes as there have been in past years, which makes investing more difficult,' he says.
Well-priced stocks that are independent of external factors are the most attractive plays, while China increasingly dominates the region.
'China is doing well economically and attracting investment from other countries in the region. Its share of manufacturing exports continues to rise,' says Forey. 'The long-term Chinese growth story is solid but finding ways to invest in it with confidence at a company level is difficult and we are sceptical about most domestic Chinese firms. They tend to find a lot of competition emerges quickly once they get into an industry.'
He says it is difficult to isolate individual Chinese stocks and the best way to play the export sector is through Hong Kong or Taiwan, where firms are increasingly moving their production to the mainland but keeping their headquarters outside. 'Most of my exposure in Asia is a play on China but it will not necessarily look that way in a country breakdown of the fund,' Forey adds.
He is also overweight india, where companies in export sectors such as software services and pharmaceuticals, as well as some domestic areas like mortgage lending, are robust.
Latin America is increasingly dominated by Mexico as investors shy away from Brazil, where there is uncertainty on local stocks following devaluation of the real and a change of government. However, there is upside potential in the wake of substantial falls, Forey says.
'If the government gets things right and confidence is maintained, interest rates could come down in Brazil, which would stimulate stock prices,' he adds.
Capital growth potential in Mexico may be capped going forward. 'Mexico has some grown-up companies and a lot of them look cheap but it has already recovered a long way from its last crisis and without a real impetus from the US, it will be hard to make a lot of headway,' Forey says.
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