Expert View: Investors should open their eyes - and their maps

There is a long-term bull trend for emerging markets
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The Independent Online

It's always refreshing to hear the views of professional investors who are based in an emerging market.

Their risk/reward equations are more complex, and their world view benefits from distance. I gave a speech in Buenos Aires last week to just such an audience. They face some tough market calls, but they do so with sang-froid.

Emerging market investors are a distinct tribe. They tend to operate from a domestic base that is full of contradictions: local markets which are enjoying explosive growth and rampant earnings multiples and yet which are volatile, unstable and subject to sharp corrections. Their economies are often highly globalised, strongly plugged into the prevailing international trends - and yet despite that, or maybe because of it, they are over-regulated and plagued with restrictions.

With an appetite for investment risk that seems exotic to jaded New York or London palettes, the emerging market investor has ridden the boom markets of recent years with some high-roller bets. The professional investor in Buenos Aires or Kuala Lumpur tends to hold a weighting in Latin American or Asian equities that is four or five times that held by British or American institutions. And crucially, the Argentinians also hold more in Asia and the Malaysians more in Latin America than their "sophisticated" counterparts.

The challenge facing these investors now is a tough one. On the one hand, there is the question of when exactly to take their money off the table. Many Latin America funds were up 70 per cent last year; myriad Asian stocks more than doubled in value. These kind of returns cannot be sustained indefinitely without some correction.

There have been some worrying signs of fringe market "blow-off" in recent weeks in some of the most over-extended emerging markets. As we point out below, Iceland is going through a serious economic downturn. Despite dramatic rate hikes, the government is struggling to find buyers for its bonds. The currency is in the process of a significant devaluation, and it seems likely that after years of dramatic growth, the economy will actually contract next year.

Similarly, one of the biggest emerging markets, Saudi Arabia, became highly over-extended in the first few weeks of the year, with price/earnings multiples on certain stocks reaching giddy heights - often 70 times. A sell-off has only been stymied by official intervention.

For the global investor coming out of London or New York, these two cases are important reminders of the requirement for diversification across your emerging market holdings and of sticking to old-fashioned, value-based stock-picking. I cannot believe, however, they are more than blips in a long-term bull trend, and with our tiny weightings, they should be exploited for buying opportunities.

For my friends in Buenos Aires, it is a tougher call. We are going through a very testing time for markets in this phase of the global economic recovery - that period when the central monetary authorities move from recession-wary loose money to co-ordinated tightening. This is the first year in many in which the central bankers in the US, Japan and Europe are all turning the screws simultaneously. Bond holders have had better times.

For equity players, my instincts remain bullish. OK, in the US higher interest rates are long overdue, the general indebtedness of the economy is terrifying and there is every danger the housing market will have a hard landing. But on balance, these negatives are dwarfed by the inflection points we seem to have reached in Europe and Japan. In both cases, we are seeing real signs of economic life after years of stagflation and false dawns. This is significant.

For too long, the world's economy has been running on just two engines: the US and China. Now it's time for a change and that's no bad thing. Investors need to take the long view - stand well back.

Christopher.walker@tiscali.co.uk

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