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Signs of decoupling boost emerging markets confidence, says Standard & Poor’s

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Global emerging markets began to show some signs of decoupling from the US and the rest of the developed world in the three months to the end of February, boosting the confidence of fun

Global emerging markets began to show some signs of decoupling from the US and the rest of the developed world in the three months to the end of February, boosting the confidence of fund managers, according to Standard & Poor’s Fund Services’ latest sector update.

‘Investors in emerging market equities lost money in this period but significantly less than investors in developed markets,’ says S&P Fund Services lead analyst Alison Cratchley.

The median global emerging markets fund lost 5.9 per cent, just over half the 11 per cent loss on the median global developed markets fund.

‘Fund managers remain relatively positive on the longer-term outlook for emerging markets,’ says Cratchley, identifying Asia as their preferred region, mainly because of China.

She gave the example of Mike Shiao and Samantha Ho, who manage the S&P A rated Invesco Funds – Greater China Equity Fund. They acknowledge that China will inevitably be affected by the global economic slowdown. However, like many other managers, they are confident that the Chinese government will devote significant resources to sustaining economic growth, so as to prevent unemployment.

The team in charge of the S&P A rated Franklin Templeton Investment Funds – Templeton Bric Fund thinks China could lead the way in a substantial recovery by emerging markets in 2009. They believe developments in the Chinese economy could influence other Asian economies, since the volume of exports from the rest of Asia to China exceeds that of exports to the US and Europe.

S&P Fund Services found less consensus on Russia. Nick Barnes, co-manager of the S&P AAA rated Traditional Funds – Eastern European Fund, has increased exposure based on a favourable view of the oil price, which he expects to reach USD80 a barrel in H2 2009, as well as on valuations.

Michael Konstantinov of the S&P A rated Allianz-dit Bric Stars & Allianz RCM Bric Stars Fund has also increased Russian exposure, believing that Russian banks will overcome their difficulties, that the oil price is stabilising and that the news on corporate governance is becoming less negative.

In contrast, at the S&P AA rated Aberdeen Emerging Markets Fund and Aberdeen Global – Emerging Markets Equity Fund, Russia is the most significant underweight on their concern about corporate governance and legal uncertainty.

Latin America, and in particular the less export-dependent economies like Brazil, is relatively well placed to weather the current global economic slowdown, according to Katy Dobson of the S&P A rated Threadneedle Latin America Fund. However, she notes that as the outlook for Latin American economies and stock markets is closely tied to commodities, the strength of demand from developed markets and China is the key variable.

‘A theme common to many portfolios around the world is defensive positioning and focusing on large-cap stocks with strong balance sheets,’ says S&P Fund Services’ Cratchley, noting that companies like this are seen as well placed to gain market share and emerge as winners from the current crisis. ‘As they often have a domestic focus, they are likely to benefit from government measures to stimulate the economy.’

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