Concern that emerging markets driven solely by commodities will be most at risk in the event of glob...
Concern that emerging markets driven solely by commodities will be most at risk in the event of global slowdown is causing fund managers to steer clear.
Julian Pendock, fund manager of European and emerging markets at Bedlam Asset Management, says economies such as Russia and Latin America are most at risk.
He is also wary of countries such as Korea and Taiwan as they are largely propelled by companies such as Samsung, which are very reliant on the West.
"The really easy money has been made," says Pendock. "For the past few years it has been like shooting fish in a barrel. People need to be more cautious now."
Craig Farley, fund manager of the Chindia fund at Ashburton, agrees. He is bullish on the Chinese economy, but warns: "There is concern that much of the good news has already been priced into the market. We have taken out portfolio insurance as a precaution."
He is also concerned by the rise of protectionist trade policies, such as the US government's decision to enact trade sanctions on Chinese paper products.
However, there are still opportunities in emerging markets. Both Farley and Pendock are investing in infrastructure and consumer-related stocks. Pendock believes they will be secular trends in the year to come.
While those who experienced the horrors of the 1997 East Asian financial crisis may well be reluctant to invest in emerging markets today, Pendock says things are different this time around.
Emerging markets now contain more than 50% of the world's GDP (for the first time since 1820) and can claim to have 70% of the world's money sitting in reserve.
He says: "We won't suffer the bloodbath of the 90s again. The debt crisis that fuelled the last crash is pretty unlikely as emerging markets today are sitting on huge pools of liquidity. The risk hasn't totally gone but the debt structure has fundamentally changed.
"Corporate leverage is at 25-year lows and, in many countries, the consumer has little debt. This means the governments of those countries have the resources to invest in infrastructure, which is necessary to sort out the bottlenecks. It is also viewed as a political necessity by the authorities as a means of increasing domestic consumption."
However, emerging markets are not without their problems. Pendock says, at an early stage, the income of these countries is export-driven but, to move forward to the next stage of growth, it is important that they wean themselves off the US dollar and move their own exchange rate up against the dollar.
Real incomes will only increase when the spending power of their own currency increases.
Making a smooth transition is not always straightforward but a heavy spend on infrastructure and corporate restructuring bode well for the future.
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