The latest asset allocation report from fund analysis specialists Forsyth Partners shows how events ...
The latest asset allocation report from fund analysis specialists Forsyth Partners shows how events of recent weeks have affected managers of global emerging market portfolios.
Forsyth's head of research, Peter Toogood, observes: "Most of the positive gains made in the first quarter of 2000 were relinquished in April. And while the weakness in technology stocks globally has heavily impacted upon all markets, Asia has suffered disproportionately, given its focus upon this sector. The strong outperformance of Asian markets in 1999 has been reversed aggressively in 2000."
Toogood notes that Asian managers are relatively relaxed about the prospects for the region in 2000 but acknowledge that the monetary environment is likely to be less supportive as domestic economies recover.
Managers are generally optimistic for Latin America going forward, confident that economic fundamentals will remain positive as the region benefits from global expansion, recovering domestic demand and a loosening monetary environment.
Within the emerging Europe, Africa and the Middle East (EMEA) region, Europe remained the focus of attention. Strong inflows into Central Europe from Western pension funds continued to be an important factor supporting the markets.
Toogood says that Poland attracted inflows into its TMT stocks from both domestic and foreign investors and the Czech Republic also saw significant buying interest into its telecom stocks as managers shifted to a more neutral stance from their previous heavy underweighting to the market.
The higher risk/reward markets of Russia and Hungary also attracted increased levels of investment. Russia was favoured increasingly for its new political stability and improving economy, assisted by a strong oil price.
Turkish equities saw a dramatic increase in domestic buying due to steeply declining interest rates, which drove investors out of fixed income.
Elsewhere, Israel has emerged as an important participant in the TMT rally, with its wealth of quality technology companies. South Africa attracted attention as a domestic recovery play and Egypt also attracted buying interest on the back of M&A activity in the cement sector.
Forsyth Partners' research service Fund Analysis & Ratings includes reviews of each individually rated fund and its current portfolio strategy. For example, the Baring Global Emerging Markets fund, managed by Matt-Linsey, remains driven by two key themes, namely secular growth stories in markets such as Korea and Taiwan, and cyclical value plays such as Brazil and Russia.
The fund remains overweight Asia, with a bias towards Korea, Taiwan and Malaysia. Although he still favours India, Linsey has issues relating to stock selection, particularly in the software sector where he believes prices are uncompetitive. Hungary is also favoured, although the weighting has been reduced as the market has significantly outperformed on a year-to-date basis.
Man Wing Chung, manager of the HSBC Asian Equity Fund, believes that the region will be characterised by further volatility generated by external rather than internal influences.
The domestic situation in Asia continues to improve, with the regional economy slowly recovering and strong earnings momentum. Man Wing does, however, acknowledge that fund flows from international investors will be less supportive after a dramatic improvement in sentiment in 1999.
Taiwan remains the favoured market in the region, based upon strong fundamentals and supportive liquidity conditions. The weighting in Korea is currently being reduced as the market is Nasdaq-dependent and likely to struggle as its benchmark weighting is lowered.
Man Wing remains underweight Indonesia and the Philippines due to the deteriorating political environment and a lack of fundamental corporate restructuring.
He has been willing to invest in Malaysia, given a recovery in the domestic economy. However, the lack of restructuring at a corporate level ensures that the stockpicking opportunities remain limited.
Peter Toogood comments: "Man Wing believes that the emergence of technology in Asia should lead to better profitability in the long term and that Asian equities can outperform, given a benign economic environment and more reasonable valuations".
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