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Magazine Issues » Dec 2009-Jan 2010

To boldly go

As the crisis in Greece escalates, emerging markets are again in the spotlight. Against the backdrop of the confidence-shattering Greek sell-off, it falls to Fidelity's Tom Stevenson, one of many commenting on the topic of emerging markets this week, to ask the crucial question for European investors: what is the right allocation to these markets?

here’s no easy answer, you’ll be unsurprised to hear, but Stevenson provides the following food for thought: “In 20 years time do you think you are more likely to kick yourself for missing the unfolding of a great investment opportunity in China, Africa or Latin America, or for missing the returns in a mature, developed economy like Japan, the UK, western Europe or America?”

Stevenson is writing a time when the number crunchers at Emerging Portfolio Fund Research (EPFR) have just reported a second straight week of outflows from global emerging markets equity funds totalling $1.6bn. “Outflows [...] hit a 59-week high in early February as investors reassessed the potential demand from developed markets for commodity and other exports during 2010,” say the Cambridge, Massachusetts based boffins. “In addition to pulling nearly $1 billion out of this fund group, investors also removed $516 million from Asia ex-Japan Equity Funds. Latin America Funds also saw modest outflows.”

This, of course, follows significant inflows last year, particularly from European investors. Fidelity’s Stevenson quotes figures from Lipper Feri: between the March low in 2009 and November $35bn was invested in emerging market equity and bond funds in Europe – 16% of all the money committed to emerging markets over that period.

What the EPFR and Lipper Feri numbers thus seem to show is that investors are bobbing up and down rather alarmingly with the market – piling in when global emerging markets were cruising towards the 17-month high they reached on 11 January and scurrying back out again out again after the MSCI Emerging Markets index finished January down 6% in US dollar terms.

Plus ça change, plus c’est la même chose. Nonetheless, this is, of course, is exactly what they should not be doing if they want to not be kicking themselves in 20 years time – pretty much regardless of where they invested.

Emerging-markets guru, Mark Mobius, executive chairman at Templeton Asset Management, reminds us of these simple truths in his January emerging-markets commentary: “We believe that the BRIC markets will develop positively over the long term, but we should not forgot that these markets are prone to short-term volatility,” he writes. “Investors who don’t want to hold their investments for at least four or five years may therefore possibly not achieve good results.”

In other words, the right allocation to emerging markets is one that stays put. But for this, investors need nerves of steel – an attribute which they, by and large, sadly do not appear to have.

Fiona Rintoul, Editorial Director
©2010 Funds Europe