The long game

Kerry Craig

Not all emerging markets are created equal, however, and the devil really is in the detail. Blindly investing into the broad emerging markets asset class could leave investors exposed to unnecessary risks, as economic fundamentals diverge widely and the sector composition of equity indices will vary by country. For example 40 per cent of the MSCI China Index is comprised of financial stocks, which may be subjected to some underperformance and hold back overall index performance as the Chinese authorities look to restrain credit growth and crack down on the shadow banking system. In contrast, countries such as Mexico and South Korea have a much smaller allocation to financials, but higher weightings towards consumer and technology sectors respectively, meaning they are well positioned to benefit from the rebound in growth in the US and the eurozone.

A more active management approach to emerging markets will mean investors can target those sectors and countries with the potential to perform better in the current economic environment. At the same time they can avoid downside risks, particularly those countries with large current account deficits whose currencies may be vulnerable to further selling pressures.

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Kerry Craig is global market strategist for JP Morgan Asset Management