PA ANALYSIS: More than just a bed of roses for amorous investors in EM
From PA ANALYSIS Feb 15 2012 BY: Gary Shepherd
, Editor
, Portfolio Adviser
Some of the most intelligent minds in the country they may be, but the swarms of City boys bamboozled by choice at flower stalls across the Square Mile yesterday proves love really is blind.
A clumsy metaphor perhaps, but the spectacle brought to mind investors frantically trying to get into emerging markets in previous years. Yep, we all know we’ve got to be in it to win it, but how can any of us really be sure we’re going to come out smelling of roses?
2011 was by all accounts not a vintage one for the developing world, not helped by China’s probably sensible decision to rein in growth.
However, a quick glance at BofA Merrill Lynch’s latest Fund Manager Survey released this week shows our love affair with emerging markets is still very much intact, albeit maybe lacking some of the passion of yesteryear.
The survey found that a net 44% of asset allocators are overweight emerging market equities this month, up from 20% in January. Looking ahead, 36% said they would like to overweight emerging markets more than any other region, while a growing majority of 86% believe that the Chinese economy is heading for a soft rather than hard landing.
Matthew Vaight, co-manager of M&G Global Emerging Markets Fund, reassured me that a lack of liquidity is not an issue at present, though he saw a different scenario in 2007 when a wall of money was thrown East, particularly towards China which did see something of a bubble as investors became caught up in first flush of love.
Vaight has a preference for what he sees as a higher quality of companies in the likes of Brazil and Mexico compared to China, where around 80% of the MSCI China index is under state control and so minority investors have little sway.
He remarked: “Too many people still become over excited by the hot, sexy growth stories, but emerging markets are less efficient than developed markets, and there’s greater scope for better returns in buying companies that are out of favour – being different is the way to do it.”
Vaight also admitted that there is a “scarcity” of truly great companies in emerging markets and so fund managers run the risk of their core holdings becoming too large. This also makes you question whether fund managers might struggle if investors once again became overly-amorous towards the emerging world and inflows increased.
As it stands, a drop in temperature and more realistic growth expectations can only be a good thing for all involved. For many of us, our relationship with those Latin lotharios or, er, Asian babes has lasted the best part of ten years, or even longer. It’s a healthy marriage nonetheless, even if, like all the best affairs, we’re always a little too uncomfortably close to a spot of volatility.