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Surviving sell-offs: top selectors on the EM equity funds to back

Citywire Global canvassed leading investment professionals from across Europe to find out which emerging market equity funds they are backing for the coming year.

The view from Madrid

Félix López, ATL Capital

We are quite underweight emerging markets. This is not a short-term call but something we consider a medium-term trend.

We think that in the near future a huge amount of opportunistic or ‘hot’ money will leave emerging economies, and in this environment the exit door is very narrow. We are now seeing the dark side of the golden EM age.

Currencies will be the first problem we face, followed by challenges in fixed income and equity markets and finally the real economy. Approaching this scenario, we will consider investing heavily again as valuations, which are ultimately the most important factor, will be quite attractive.

It’s true that not all the EM countries are the same but as an asset class we consider developed markets more attractive right now.

In light of all this, the small investment we do have is split between the Vontobel Emerging Markets fund and Banque de Luxembourg’s BL Emerging Market fund, which we like for the manager’s flexible use of cash.

The view from Belgium

Robin Curry-Lindahl, LCL Asset Management, Brussels

QE has been in the driver’s seat all along and it is difficult for the Fed to just stop it. There are still deflationary pressures, so monetary easing will be around for a long time, just look at Japan over the past 20 years.

Tapering is not to end the QE, that is, the stock market will not drop as it did after QE1 and QE2. And as the valuations in the US market have become stronger, some Asian markets could rebound on continued global QE.

We are looking at Korea and Turkey. The KOSPI index fell 2% in 2013, while Japan’s Nikkei was up 41%, due to massive QE. The Korean stock exchange is among the cheapest in Asia and is expected to grow 3.9% in 2014.

The fund’s we have on our watch list are the MSCI South Korea Index fund and the First Trust South Korea. Both are down approximately 6% in 2014.

Turkey could be a rebound situation, the government is fighting a constitutional crisis and corruption scandals. Turkish stocks trade at eight times earnings. The index dropped 13% in 2013 and another 9% in 2014. We have our eye on the MSCI Turkey ETF.

The view from Germany

Simon Frank & Thorsten Querg, FOCAM

Emerging market assets have been out of favour now for quite some time and recent underperformance versus developed rivals, as well as structural challenges in some countries, have depressed investor interest further.

While these markets are currently unpopular, the long-term returns offer real potential. Following significant underperformance since 2011, valuations generally look attractive now both in absolute and relative terms.

Recent currency devaluations also provide the foundation for an economic turnaround as many countries become more competitive and attract foreign investments once again.

Our first fund pick for the asset class is Aberdeen Emerging Markets Equities, which has been managed by Devan Kaloo and his team in a very consistent, transparent and successful way for more than 10 years.

Secondly, we like Templeton Frontier Markets, run by Mark Mobius, Carlos von Hardenberg. and team. This has a solid five-year track record with superior risk-adjusted returns. If our research team identifies attractive opportunities in single countries we would use ETFs as well.

Holger Bachmann, BMW Bank

Probably more than most asset classes, emerging markets are driven by investor sentiment: despite all (undoubtedly sustained) growth prospects in the area, institutional investors pull back at the first sign of market upheaval, as evidenced in the massive slide in the wake of Bernanke’s talk about tapering last summer.

As a result, we tend to avoid narrow exposure to countries or sectors – so no Chinese infrastructure fund, for instance – but rather focus on broadly diversified portfolios with a tendency towards quality and attractive valuations.

Veterans in this sector certainly are First State’s Angus Tulloch and Templeton’s Mark Mobius and Carlos von Hardenberg, with whom we have been investing for a couple of years now.

True to our anti-cyclical convictions, in the wake of strong performance we have been trimming our exposure since the beginning of 2011 and have reduced it steadily over the last couple of months.

Nevertheless, we see emerging markets as a key component in a global portfolio that will offer new opportunities once the current correction has ended. We remain cautious about the liquidity situation in the bond segment, however, where we have only minor exposure.

The view from France

Benjamin Caron, INVESCO

There is a clear lack of visibility in emerging markets and while some indicators have stabilised I believe the whole region is still going through a transition phase.

We are seeing a below par growth environment and the upcoming national elections in many emerging countries will create some uncertainties. On top of that, inflation will remain fairly moderate in general with some isolated pressure on specific regions.

Regarding investor sentiment, flows continue to leave the region, which keeps the whole asset class at risk of more setbacks. Moreover, liquidity reduction is generally not good for this asset class.

One of the triggers that could drive inflows back into this region would be to have an economic turnaround between developed and emerging markets.

Among the markets that I still prefer are those with a significant exposure to developed countries like Mexico, Poland and Hungary. I avoid the Fragile Five countries – Brazil, Turkey, Indonesia, South Africa and India – many of which are at risk due to political uncertainties, debt problems, current account issues and are driven by the commodities markets.

Within my fund portfolio I have been investing in the Invesco Asian Equity fund, run by Stewart Parks, for quite some time. I also hold the Lyxor ETF Emerging Markets fund.

This article originally appeared in the February issue of Citywire Global magazine

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