EM investors ‘should expect further underperformance’

Brewin Dolphin’s Guy Foster has warned that investors in emerging markets should be prepared for a prolonged period of underperformance.

However, Mr Foster claimed the region was unlikely to devolve into “a crisis in the traditional sense”.

Emerging markets have been hit in recent months by falling currency valuations, exacerbated by the withdrawal of money from international investors.

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The reduction in the US bond-buying programme of quantitative easing has in particular hit hard countries with high current account deficits, which are more reliant on foreign capital.

But Mr Foster, head of portfolio strategy at the discretionary manager, said there were now signs of contagion as even robust emerging market economies were being affected.

He said: “Korea has seen [its currency] the won fall 3 per cent year to date, despite running a 5 per cent current account surplus last year. Even the Taiwanese dollar is 2 per cent lower, despite running a 10 per cent current account surplus.”

However, he said the state of emerging economies and their susceptibility to the withdrawal of foreign money, was now very different to when a similar flight of foreign capital sparked the Asian crisis in the 1990s.

He said: “Asian and emerging market economies now operate looser exchange rate policies, making it easier for them to flex in the face of the ebb and flow of currency flows.

He also pointed out that “Asia’s collective trade position had moved from deficit into surplus as substantial players have established an export-driven trade model”.

He therefore claimed that while emerging markets would continue to suffer, it should not turn into a full-blown crisis.