Intermediaries are facing an emerging dilemma

John Kenchington

One great thing about the fund industry is the willingness of its top proponents to stick their necks on the line and make bold macro calls on global markets.

And right now there is one crucial call that may prove to be decisive in determining which fund managers dominate the performance leagues in five years’ time.

It’s the decision whether to buy emerging markets, hoping the recent falls have created an attractive opportunity, or to sell them in the belief the structural threats will generate a calamitous bear market.

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Jupiter’s investment boss John Chatfeild-Roberts last week issued a client note making his views quite clear – emerging markets are an inferior bet, in spite of the falls. He spent much of 2013 restructuring his giant range of Merlin funds of funds to slash their major weightings in emerging markets, chiefly by selling down Angus Tulloch’s First State Asia Pacific Leaders.

Instead of that, developed-market products have been bought, with funds such as Odey Allegra Developed Markets and Aptus Global Financials debuting in his top-10 holdings lists.

He, like the other doubters, feels emerging economies will continue to suffer as the US Federal Reserve peels away its monetary support – because the Fed will always put its domestic economy first.

However, also last week Artemis’s William Littlewood told clients he was reversing an underweight stance in emerging markets that he’s had for so long it’s practically become religious doctrine. He believes that while some emerging markets face a “nasty recession”, the situation is a cyclical, rather than structural, one, but a structural decline is on the cards in the developed world, where valuations have also risen sharply in the past five years.

He’s targeting Brazilian bonds, citing tasty-looking fundamentals. He’s also been topping up Samsung, factsheet history shows.

This quite binary emerging market dilemma is playing out across the industry.

Cazenove’s Marcus Brookes is continuing to steer clear of emerging markets, but F&C multi-managers Rob Burdett and Gary Potter and Threadneedle’s multi-asset chief Toby Nangle are dipping their toes in.

Old Mutual’s multi-asset guru François Zagamé thinks emerging markets will win out, citing earnings growth and valuations. Miton’s generally bearish Martin Gray has just 0.5 per cent in emerging markets in his Special Situations fund.

The problem for intermediaries in these binary scenarios is whether to make a call either way, or adopt a moderate amount of exposure to reduce clients’ overall directionality.

But in this case, if we really are on the brink of a deep, structural emerging market bear market – as the Chatfeild-Roberts, Brookes and Grays of this world clearly feel – you may find yourself having to stick your neck out, too, this time to save your clients from painful outcomes.

John Kenchington is editor of Investment Adviser