Meera Patel: Don't give up on emerging markets yet

The Analyst

There have been plenty of headlines recently warning investors of a bubble or a crash waiting to happen in emerging markets. After an exceptional run in the last year, these markets have already shown signs of weakening, but as with all things, this needs to be put into context.

It is worth going back to basics to understand emerging markets. These are countries going through a period of rapid growth and industrialisation. The term can be used loosely, but, importantly, emerging markets stand out because they have certain characteristics.

Many of these countries have large populations and large resource bases and will be undertaking economic and political reform. Their economic success will spur development in the countries around them. They can vary in size from the very big, such as China, to smaller economies, like Thailand. However, one thing they have in common is that they are among the world's fastest-growing economies.

One emerging country that concerns many commentators is China. The economy has swelled in recent years and it is on track to become the second largest economy in the world by overtaking Japan. Recently the Chinese authorities have indicated that they need to dampen growth and the stockmarket has headed downwards. However, I believe this will create opportunities for investors.

Brazil is another area of concern, particularly over the last year, as the market has performed extremely well and there are questions surrounding the attractiveness of valuations.

Emerging markets are not just made up of China and Brazil, or even India and Russia, which famously make up the remaining BRIC [Brazil, Russia, India, China] economies.

There are, in fact, 24 emerging markets at the moment, and tens of thousands of companies in these markets. So whilst there may be periods when some economies are not as attractive as others, at an individual company level there is still a wealth of opportunities.

This is precisely what Jonathan Asante aims to take advantage of when managing the First State Global Emerging Markets Leaders Fund. He has a particular focus on quality, which means he invests in companies with real earnings and profits. He does not follow the herd into stocks that are driven by momentum, and maintains a defensive bias.

While some parts of India, Brazil and China look expensive, there are pockets of value at the company level. For example, Mr Asante has been buying into Bharti Telecommunications, an Indian telecoms company that many investors have been selling due to fears over competition. Going against the herd, he has bought shares in the company at lower prices as he believes competition will actually prove beneficial in the long run because it will promote innovation in the sector.

Other areas where he is finding attractive opportunities include South Africa, Israel, Korea and Taiwan. Some of these may not be considered mainstream emerging markets, but they offer attractively valued companies.

As it is likely to be a volatile year for emerging markets the fund is cautiously positioned.

Mr Asante has retained exposure to gold mining companies that he expects to show resilience amidst a turbulent backdrop. There is also a significant exposure to consumer sectors, which are expected to benefit from strong demographic trends and a growing middle class population, whose aspirations will lead them to buy luxury goods such as mobile phones, cars, and houses.

During periods when markets are falling this fund tends to outperform its peers. Conversely, given its defensive nature, it tends to fall behind during a strong rally. Importantly, the First State emerging markets team have more than made up for any periods of underperformance during more difficult periods, so overall they have an outstanding long term track record.

It is likely to be a bumpy ride for emerging markets this year, but this fund is a superior way to gain exposure and, in the long term, the case for investing is firmly intact.