Overall, emerging markets are down by about 25 per cent this year, while the worst-hit markets include the Ukraine, which has fallen by almost 60 per cent this year; China, which is down 57 per cent due to fears of a bubble; and Russia, which is down 46 per cent since its May 19th peak.
The Brazilian market has fallen by about 20 per cent, and India is down by about 30 per cent for the year to date.
For investors, emerging markets are riskier than developed countries. “The political risk is higher and you may get individual countries doing silly things on an individual basis,” says Chowdry, citing Russia’s recent activities in Georgia. “The other risk is that stock markets are relatively immature with less developed corporate governance structures, but the major risk factor going forward is probably the external environment, and in particular, the US economy.”
One trend currently affecting emerging market funds is the “flight to safety” of investors, both institutional and retail, out of riskier equity funds to safer investments such as bond and cash funds. According to data provider EPFR Global, over the past three months, outflows from emerging markets bond and equity funds reached $29.5 billion (€ 20.9 billion), the highest level since at least 1995, and withdrawals continue to gather pace.
However, Chowdry says that this “panic” selling is leading to a great buying opportunity.
“I don’t believe where we are today is any different from other crises such as the Mexican crisis, the Russian crisis or 9/11. These were all periods when markets fell in the short term, but subsequently proved to be great buying opportunities, and I believe that we’re currently in one of those great buying periods now.”
He cites factors such as a levelling off in inflation as being behind the next wave of growth. “As inflation peaks, we expect interest rates to come down,” he says, adding that he favours the Brazilian and Indian markets.
“Brazil is one of the cheapest markets in the world, with some of the highest earnings growth.”
Although India has been one of the worst-performing markets in the world so far in 2008, down by about 30 per cent in the year to date (not as bad as the Iseq, though, down almost 40 per cent), Chowdry believes it’s close to bottoming out.
“India is a very big importer, so when oil prices went through the roof in the first half of the year, the market suffered as inflation rose, interest rates rose and corporate earnings suffered. However, the story on India today is as oil falls it will kick in significantly in terms of corporate earnings.
“The other thing we like about India is that it is very much a domestic demand story in the sense that the growth in the economy is being led by local demand, local consumers, local industry, rather than exporting to the US or developed countries.”
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