Fund managers move towards emerging markets as Europe's performance declines

Date: Thursday, May 27, 2010
Author: Hedge Funds Review

Emerging markets continue to rebound strongly in 2010 whereas the outlook for Europe appears to be growing bleaker, according to expert fund managers speaking in London.

“Emerging markets are fundamentally strong. There has been a strong rebound, which is being led by domestic activity," said Devan Kaloo, head of global emerging markets at Aberdeen Asset Management.

He was speaking as part of a fund manager panel debate, organised by RBC Wealth Management. Other members of the panel included representatives from Aberdeen Asset Management, RBC Global Asset Management, Martin Currie, Saguenay Capital and Invesco Perpetual.

Kaloo warned emerging market policymakers should be wary of policies that controlled inflation at the expense of continued economic growth.

Phil Langham, senior portfolio manager at RBC Global Asset Management, agreed that emerging markets could offer significant opportunities in the future.

“The global growth momentum has turned negative. The momentum has slowed. However, global liquidity is positive. This has been helped by the pick-up in money supply in China and the US,” he said.

“There are strong reasons to believe that emerging markets will see a consumer boom as a result of a relatively low level of household debt coupled with long-term potential for disposable incomes to increase," Langham continued.

"We expect to see an increase in median disposable per capita income in some of these markets. Our investment position therefore focuses on the domestic and consumer sectors, which have vast scope for future growth," he said.

While managers were positive about prospects in emerging markets, the same could not be said about Europe. The sovereign debt crisis in Greece and the subsequent bailout, as well as fears about the economies of the Mediterranean Pigs (Portugal, Italy, Greece, Spain), has caused jitters.

Invesco Perpetual’s UK fixed income product director Lewis Aubrey-Johnson painted a bleak picture. “The gains are now gone. The markets are down to bond-like returns. Greece has a debt ratio to GDP at 120%," he noted.

"Argentina in 2001 had a debt half of that. The situation in Greece has exposed the structural challenges of western economies where debt ratios are high. The last period there were debts like this was after World War Two,” he added.

Brian Walsh, chief investment officer at Saguenay Capital, warned the eurozone's approach to the debt crisis was not sustainable.

“A debt crisis is never solved by adding more debt; it simply postpones the inevitable day of reckoning. Too much debt has to be solved in one of three ways: default, inflation or economic growth or restructuring,” noted Walsh.

Nevertheless, the managers agreed the crisis would not be the death knell of the euro.

“The crisis exposed the flaws in the eurozone. The Maastricht Treaty was ignored and we saw political divergence. However, the eurozone won’t fail,” commented  Aubrey-Johnson.

"The key will be whether members will remain in the euro. In the longer-term, there has to be a closer fiscal union," he concluded.