fund managers are cautious, favouring countries that are less hostile towards the US
The outlook for slower global growth has had an impact on the emerging markets. Although fund managers are cautious towards economies reliant on the US for growth, they are beginning to position their portfolios towards countries that will benefit from a US recovery.
The latest research by offshore fund research specialists Forsyth Partners shows stronger weightings towards countries in the Asia Pacific region.
Venkat Chidambaram, investment director and fund manager of the GAM Star Emerging Market ' US$ Class, says: 'We have a top-down view and favour countries less hostile to the US such as India, China and South Africa.'
GAM has overweight positions in India and China and underweight positions in South Africa. Chidambaram says the Indian economy is stable and expects GDP growth in India to be around 5%-6%. He recommends companies linked to consumer spending, such as food producer Nestle.
Similarly in China, Chidambaram has chosen companies in his portfolio that are exposed to GDP growth.
He favours motorway operator companies because more people are expected to use roads in the future as the economy picks up. He also recommends computer manufacturer Legend Holdings because this area has low penetration rates.
Nick Moakes, manager of the MLIM Emerging Markets Fund, agrees with Chidambaram's view.
He says: 'As a region, Asia will not be as adversely impacted as Latin America by the rise in risk aversion. External financing needs are generally low. The issue for the region, in the aftermath of the events of 11 September, is the impact upon global growth. Export to GDP ratios are high relative to elsewhere. A slowdown in global growth will impact the revenues of many companies in the region. On a regional basis, Asia marginally outperformed both Latin America and EMEA but all regions fell sharply.'
However, Moakes disagrees with Chidamabaram on which countries have performed well. He says: 'Of the major markets, China, Brazil, Taiwan and South Africa proved to be the worst performers. Malaysia, other Asean markets and the smaller markets in Latin America proved to be the most resilient.'
Moakes explains the Chinese market performed extremely poorly over the quarter with the market losing close to one third of its value. For example, China Mobile, which represented more than 60% of the index, fell by 30% in August alone, following the announcements of poor results.
In Malaysia, investors have been encouraged by signs that foreign currency reserves have stabilised, reducing the risk of devaluation, coupled with some evidence of corporate restructuring, says Moakes.
However, GAM is also in the slow process of adding exposure to countries economically linked to the US. Chidambaram says he is seeing signs of stabilisation in the US economy.
The NAPM index has already seen a recovery in the last nine months. In September, it rose to 47 from 41 in January. Interest rates and oil prices have fallen and this will help stabilise the economy.
Countries that GAM has been adding to are South Korea and Mexico. For example, in South Korea, Chidambaram has been adding to his technology and engineering weighting.
He explains that South Korea will benefit from the economic pick up in the US as exports regain strength and operational conditions improve in around 12 months time.
In Mexico, Moakes says the country looks the most attractive in the region. He expects Mexico to achieve investment grade status in the medium term and even if the current account deterioration exceeds current estimates the financing requirement should be achieved without too much difficulty.
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