2014: the year of emerging markets

Philip Saunders, portfolio manager across the Investec Managed Solutions Range, says: “Emerging markets have been disappointing in 2013 with slower growth and weakening currencies leading to sustained downgrades to forecasts of corporate earnings growth.

“This in turn has undermined equity valuations. Valuations are now attractive in both absolute terms and relative to developed markets but earnings forecasts continue to be reduced.

“Bond yields have backed up, partly in tandem with developed market yields, partly due to domestic problems. Some currencies have fallen to attractive levels.”

He adds: “A strategy of building long-term equity exposure during the year is likely to be well-rewarded while further currency weakness could provide an attractive long-term opportunity to invest in emerging markets.”

Bestinvest, in its managed portfolio, has been a long-term emerging markets bull, but managing director Jason Hollands offers words of caution to those that conclude that current valuations offer a “basement bargain opportunity”.

“A US exit from quantitative easing (QE) could initiate a process of re-pricing of risk around the globe which would be painful for these markets,” he says

“The ultra-low yields of recent years stemming from QE have provided cover for significant emerging market debt issuance with total emerging market debt estimated to have doubled since the Fed embarked on QE. A rise in developed market bond yields will have a knock-on effect into these markets.”

Mr Hollands remains cautious towards China in particular, warning it has become “over-reliant on inefficient, debt-funded internal investment”.

“With new leadership signalling the country needs to maintain GDP growth of at least 7 per cent in the next decade to sustain job creation, there is a real risk that the pursuit of growth will allow the imbalances to become even more pronounced,” he explains.

“The temptation must be building to devalue the Yuan to improve export competitiveness, a move that could reignite currency wars.”

But Legg Mason subsidiary Brandywine’s managing director David Hoffman argues that “select countries” look attractive at the moment and “delayed tapering gives the universe a little more room to implement structural reform”.

Mr Hoffman adds: “Mexican fundamentals are stronger today than ever following tax, education, and pending energy reform.

“Countries like Indonesia and India are cutting fuel subsidies. Emerging markets are making difficult decisions to improve efficiency and stability – a positive step.”

Jenny Lowe is features editor at Investment Adviser