Emerging markets: EMs remain equipped

Drivers of growth are likely to stem from the rise of consumer markets across the emerging world as the middle class expands, aided by rising incomes and favourable demographics.

Additionally, we believe intra-regional trade will continue to flourish, reflecting an increased flow of goods, commodities, remittances and direct investment. Infrastructure opportunities also abound in the emerging world, as the likes of China and India continue to develop at a rapid pace. Valuations continue to look attractive for the asset class. The MSCI Emerging Markets index trades at below 10.5x its earnings in the next 12 months, according to analysts’ consensus, which is undemanding in the context of historical valuations and supportive of growth in corporate earnings.

Equity markets are pricing in a negative market environment for 2012. However, if the eurozone debt crisis does not deteriorate this should support a strong performance for markets.

We remain positive on China, due to the combination of attractive valuations and supportive policies from the government, both monetary and fiscal. A sharp decline in inflation could allow authorities to accelerate their loosening of monetary policy and increase the financial sector’s loan quota – a centrally defined amount which the banks are able to lend.

We also expect a smooth transition in China’s leadership, which should focus on boosting consumer spending, social welfare and key industries.

We also like South Korea as we see an undervalued currency the exporters in the IT sector and in its automotive sector. We expect demand from emerging markets to be the driver of growth in Korean exports. An improvement in developed market demand would be a positive surprise.

The Brazilian equity market has also become more attractive due to a decline in its valuation, combined with the country’s ability to stimulate both monetary and fiscal policy. The latter should benefit infrastructure related sectors, while the former is expected to support overall consumption and investment.

Elsewhere, we have become more cautious on Peru, Colombia, India and Indonesia. We have lowered our expectations for Peru due to the impact of social pressure on its mining activity and the potential negative effect of this on economic growth.

During the next 12 months, there are drivers that should support emerging market growth: a decline in inflation, which will allow a continuation of monetary stimulus by various emerging countries; corporates taking advantage of very low interest rates for their investment plans; and a resolution to the European debt crisis supported by the European Central Bank.

At the same time, emerging markets remain better equipped to handle external volatility, as foreign reserves continue to grow relative to the developed world.

Roberto Lampl is head of emerging market equities at Baring Asset Management