Asian and emerging markets have hit the headlines recently in a way that many investors won't be used to. Currencies and stock markets have been falling. The Indonesian rupiah, Brazilian real, Indian rupee and South African rand have all fallen quite markedly against the dollar this year. At the time of writing the Indonesian stock market has fallen almost 10 per cent over just two days.
One thing these countries have in common is large budget deficits, essentially meaning they rely on foreign money to fund themselves. This hasn't been a problem in the past few years as cheap money from the US Federal Reserve's quantitative easing (QE) programme has helped sustain them. But now talk of tapering, or reducing, the rate of QE has led to foreign money leaving these "hot" markets.
It is never pleasant to see the value of an investment fall, particularly one that has done well in recent years. Asian markets emerged from a huge financial crisis in the late 1990s and have since become the darling of many investors' portfolios. One has only to look at the investment trust sector a few months ago, when many Asia-focused funds were trading on a premium, to gauge the extent of their popularity. In the world of open-ended funds, First State and Aberdeen have been trying to slow the tide of money flowing into their Asian and emerging market funds by raising initial charges. I recently caught up with Hugh Young, manager of the Aberdeen Asia Pacific Fund, via telephone from Singapore to get a view on what is happening on the ground.
Mr Young is a consummate professional, immensely experienced, and has seen just about everything this area can throw at you. I found him remarkably relaxed, neither particularly bearish nor bullish, although it should be noted that he only considers the prospect for individual companies, rather than the stock market or economy as a whole. Mr Young believes it is near impossible to forecast what will happen from an economic point of view and the effect this could have on companies. He would rather concentrate on the companies and whether they can weather the bad times that inevitably come along during the business cycle.
That said, he understands that the area has been hurt by the unintended consequences of quantitative easing. He also cites recent downgrades to company earnings forecasts as a factor in recent stock market falls. Indeed, emerging markets have underperformed their developed counterparts over the past two years. However, Mr Young points out that the balance sheets of both large and smaller companies are in better shape in the East than the West. Asian companies have always been better prepared for a worsening economy, he says.
Recently, he has been building exposure to mining and materials companies, investing in underperformers such as Rio Tinto and BHP Billiton. He feels that management at these companies are at last getting back to basics and focusing on shareholders, rather than splurging money on expensive acquisitions.
In Asia he has been topping up two Singaporean banks which have particularly strong balance sheets. For exposure to India he is happy to hold a position of about 10 per cent, partly in the Aberdeen Global Indian Equity Fund. He does despair of Indian politics, which has been holding the country back for many years, but he is happy with the underlying companies in the fund. As for China, he would be prepared to increase exposure if corporate governance were better.
Mr Young is a long-term investor seeking out high quality companies capable of surviving through thick and thin. Portfolio turnover tends to be low and many companies have been held for more than 10 years in Aberdeen's range of Asian funds. He is happy with all the underlying companies he holds, and he is a manager I would trust with my money for the long term.
I believe those investing regularly in Asian and emerging markets should continue to do so, but for those seeking to add a lump-sum investment there could be more downside yet, and a more opportune time to invest might present itself. The region is starting to look cheap, according to our analysis, but I would prefer it to look slightly cheaper before becoming more positive.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit hl.co.uk/independentReuse content