Artemis’s Littlewood reverses strategy on emerging markets

Artemis’s William Littlewood has reversed his bearish view of emerging markets for the first time since his Strategic Assets fund launched in 2009.

Mr Littlewood, who has been vocal on his lack of conviction in the recovery in developed markets in the past five years, believes that emerging markets now look to be in a better position than their developed counterparts.

The view contrasts starkly with that of Jupiter’s investment chief John Chatfeild-Roberts, who said last week that 2014 would be a year in which focusing on developed-market equities would win out as emerging markets suffer from the US Federal Reserve reducing its monetary support.

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Mr Chatfeild-Roberts spent much of 2013 revising his range of Merlin fund-of-funds portfolios to reduce focus on emerging markets – which corrected sharply amid the US Fed move – and switch to developed-market stockpickers instead.

But Mr Littlewood has been adding to emerging market equities and is about to start buying emerging market bonds, according to his fund update.

Emerging market equities make up 5 per cent of the portfolio, which he said was the highest level since the fund’s launch and is up from nothing a year ago.

The position is split mainly between Russian oil and gas companies and Samsung Electronics, although Mr Littlewood is also investing in two emerging market investment trusts that are trading on wide discounts.

In addition to the direct exposure, Mr Littlewood said he had a further 3 per cent of the fund in developed market banks with heavy emerging market exposure such as HSBC, Standard Chartered and Citigroup.

Mr Littlewood explained the negative sentiment towards emerging markets in recent years showed his “longstanding caution towards emerging markets has been justified”.

“But as valuations decline we are becoming more constructive,” he added.

“The structural issues faced by the developed world are far more challenging than those in the developing world.

“So, where we can, we are gently shifting the portfolio towards emerging markets.”

He said emerging market companies were trading at significant discounts to developed market companies, the biggest discount in either five years or 10 years, depending on the valuation metric used.

He acknowledged the potential risks facing the economies, and said some of the countries could be “on the verge of a nasty recession” but said it would be a cyclical slowdown from which the economies would rebound quickly. This is in contrast to the long-term structural decline that he sees enveloping the developed world.

In addition to the growing emerging market equity position, Mr Littlewood revealed that he is close to investing in emerging market debt within the Strategic Assets fund as well.

Mr Littlewood noted that a long-dated government bond from Brazil yielded 13.9 per cent. He said this was good value because it meant he received a real yield – the yield of the bond minus the country’s 5.9 per cent inflation rate – of 7 per cent.