Keeping your nerve in the face of strife

chess_pieces_410Investor appetite for emerging markets has held steady for a number of years so now, with rampant unrest in the Middle East and North Africa, it is natural to question whether the turmoil will quell this hunger.

I travelled to Scandinavia recently for our upcoming Nordic Special Report and asked this question of the market participants I met there, considering that the region’s investing public has been well known for its allocation to these regions.

The general consensus among the Nordic players was that the turbulence might well affect sentiment, especially in the short-term.

One expert said: "In the short-term, the turbulence in North Africa may have an impact on sentiment."

This view is backed by fund flow figures. Statistics from data provider EPFR show that in the third week of February, investors yanked $5.45bn (€3.9bn) out of emerging markets equity funds. Emerging markets bond funds had their worst week since late 2008. Funds focused on frontier markets equity also fared badly, posting outflows for the first time since mid 2010.

Neil Dwane, CIO Europe at RCM, said: “In terms of investment strategy, when evaluating portfolios in the light of the current unrest in the Middle East and North Africa, there are instinctive reflexes at work. Firstly we expect many investors to rush to ‘safety’ in US Treasuries, other government bonds, the Swiss Franc and gold, and we are starting to see this already happen in practice.

“Secondly, equity investors are likely to reassess companies’ vulnerability to events in the specific countries affected and to rising oil prices generally, especially if the unrest suggests an elevated oil price for more than a few days. Thus markets have rationally penalised many large European oil majors for their exposures to Libya, whilst in the US the oil majors have risen on the back of higher oil prices.”

Clearly, the political strife in Egypt, Bahrain, Libya and Jordan has underlined the risks investors take on when investing in these markets. But a fund manager in Scandinavia said: "A long-term impact on investor sentiment is not very likely, although that largely depends on the outcome of the turmoil. However I still believe that emerging markets wlll form a large part of a Nordic investor’s portfolio. They know these markets very well."

Investment managers in other parts of Europe also remain unruffled and still feel there are sound opportunities in the Mena markets and are making this clear. One example is ING Investment Management. The firm is hosting a media conference in early March to confirm that despite the current turmoil in the Middle East and North Africa it still believes that the Mena region offers investors very attractive opportunities. And considering that investors still have upwards of $20bn in emerging market funds, one would hope they're right.

Angèle Spiteri Paris, deputy editor
©2011 funds europe