Spooked investors reconsider emerging markets

Emerging markets may be making something of a rally, but according to the latest Lonsec Sector Review of Global Emerging Markets and Regional Equities, the past year has seen them subject to deep negative sentiment and anxiety.

However, the magnitude of the current rally has been underlined by record net inflows into emerging market equity funds during the second quarter of this year.

The Lonsec Review has resulted in just two funds — the Templeton Emerging Markets Fund and the TAAM New Asia Fund — receiving the company’s top ‘highly recommended’ rating, while the Premium China Fund fell from grace, downgraded from ‘highly recommended’ to ‘recommended’ on the back of what the ratings house described as a period of change within the underlying manager of the fund, Value Partners.

The sector review also noted that the Fidelity India Fund had been placed on ‘fund watch’ following a review of performance and investment style and the retrenchment of Arun Mehra in March.

As part of its review of the emerging markets and regional equities sector, Lonsec urged the incorporation of a top-down approach into investment research in circumstances where it said “there remains considerable political and liquidity risk premium when allocating to emerging markets”.

It said, pleasingly, most managers in Lonsec’s universe incorporated a disciplined assessment of top-down considerations into their investment processes.

The ratings house said much of the past year had been typified by deep negative sentiment and anxiety in equity markets in general, but even more so for those markets deemed higher risk premium markets, including emerging markets and Asian markets.

The Lonsec analysis pointed to the fact that the emerging markets index fell 48 per cent in the second half of last year, “with capital exiting with frightening velocity”.

“Interestingly, the recent improvement in market sentiment in the second quarter of 2009 has brought an emerging markets rally,” it said. “It is too early to confidently predict whether this move is a leading indicator of a broader global recovery in 2009, but there has been a remarkable rise in demand for emerging markets exposure.”