We are near the optimum point in the global economic cycle for emerging market equity investing 
(20/07/2010)
According to James Syme, Head of Emerging Market Equities and manager of the Baring Global Emerging Markets Fund at Baring Asset Management, we are near the optimum point in the global economic cycle for emerging market equity investing. Barings says that the combination of the recovery in the global economy, helped by a rebound in the US, and continued low interest rates in developed markets is driving emerging markets earnings estimates. In addition, Barings believes the asset class is attractively valued.
Syme explains: “Global equity markets have fallen from their mid-April highs amid worries about the build up in sovereign debt levels. However, this is a developed market, rather than an emerging market problem. Looking ahead, we continue to expect a reallocation of investments away from developed equity markets towards emerging markets and the ongoing sovereign risk in the Eurozone may intensify this trend.”
The Baring Global Emerging Markets Fund favours domestically focused companies in countries with strong growth potential. Consequently, the fund is currently overweight the benchmark index in Russia, Indonesia and Turkey and continues to favour China. All four economies are booming from increased consumer spending.
Syme explains: “On a country level, Russia is our biggest overweight at the moment. Russia’s economy is recovering well after the difficulties of late 2008 and early 2009. We have seen substantial interest rate cuts and the currency has been strengthening. We are most positive on the outlook for the domestic economy and the consumer in Russia. We have some exposure to commodity companies, but this is only a small percentage of our holdings.”
Syme continues: “Indonesia and Turkey have seen dramatic falls in inflation and interest rates over the last three to five years. The legacy of the years of high inflation and high and volatile interest rates is beneficial because the level of borrowing in these economies, particularly on the consumer front, is extremely low. Now, both countries are seeing an expansion of consumer credit, with a related boost to economic growth. There are a lot of opportunities for banks and consumer focused companies in Indonesia and Turkey and we retain a focus on these areas.
“We think China’s economy has extremely good fundamentals. One of the most notable features of recent economic newsflow has been the strength of consumer spending and retail sales year to date. Over time, we expect wages to rise, which should mean an increase in the purchasing power of the Chinese consumer. Our holdings in China currently comprise a mixture of financial and consumer stocks.”
At a sector level, the three largest overweight positions are in the consumer discretionary, financials and information technology sectors. Drilling down to the industry level, Barings has significant exposure to autos and commercial banks.
Syme explains: “Our exposure to autos and commercial banks means our portfolios have a relatively pro-cyclical stance at the sector level and this has been working well for us over the last six to twelve months. Amongst our auto investments, we hold Astra International, Indonesia’s largest automotive distributor and Hero Honda, India’s leading motorbike retailer. Both companies have seen strong sales growth, which has driven their share prices sharply higher. Since the start of 2007, Astra International’s share price has more than tripled, whilst Hero Honda’s share price has risen by almost 300%, despite this three-year period being difficult for emerging markets generally. What I am keen to convey in highlighting these two stocks is that the emerging market consumer story is not just about the future - it is a story that is already playing out and translating into strong returns for shareholders. As ever, however, getting stock and country selection right is essential.”
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