21/1/2010
By Sophie Baker
Investors must not become complacent over their dealings in emerging market funds, warns HFM Columbus, despite huge 2009 gains.
Investment director at the HNW wealth manager, Rob Pemberton, warned that despite the Chinese, Indian and Brazilian stock markets enjoying 80 per cent rises, and Russia with 100 per cent growth over 2009, investors who are keen to get a slice of this positive action could be tripped up by the hype.
"There is no doubt that all these economies are rapidly increasing their share of global GDP," he said. The low debt levels, young and dynamic populations and companies that are moving through the world leader ranks are all attractions, but the so far comforting and predictable positive results could lead to complacency.
"Huge rises and falls are a way of life in these markets. Even after the substantial rises in 2009, most emerging market stock-markets are below where they were at the beginning of 2008 because of the market carnage that year.
"These markets remain closely correlated to the US stock market - so any correction on Wall Street will likely to be felt in greater magnitude in these markets. The economies may be increasingly 'de-coupled' but the same cannot be said for the global stock markets, a point often overlooked by the emerging market cheerleaders," he explained.
There are two flies in the ointment, Pemberton said - volatility and valuations are worrying issues. An investor must look at the price they are paying for economic and corporate profit growth.
"Historically emerging markets used to trade at a discount to developed markets due to their record of instability but this is no longer the case and emerging markets are starting to look dangerously pricey.
"China and Brazil trade on around 14x earnings, in line with developed markets, and India a pretty rich 18x. The only significant emerging market with a P/E of less than ten is Russia," he said.
Pemberton is also concerned at the narrow view investors tend to have of emerging markets: "When investors think of emerging market funds there is a tendency to assume that they are BRIC fund (Brazil, Russia, India and China).
"This is a misconception as the most widely used fund benchmark is the MSCI EM Index which is weighted approximately 18 per cent China, 17 per cent Brazil and only seven in India and six per cent in Russia, with the balance spread around Asia and elsewhere.
There are around 12 per cent each in Korea and Taiwan as well as seven per cent in South Africa," added Pemberton.
