Lonsec releases 2010 Global Emerging Markets and Regional Equities Sector Review


Lonsec has released its 2010 review of the Global Emerging Markets and Regional Equities sector, encompassing 20 funds. Four funds were awarded Lonsec’s highest accolade, ‘Highly Recommended’ – the Templeton Emerging Markets Fund, TAAM New Asia Fund, Aberdeen Emerging Opportunities Fund and the T Rowe Price Asia Ex-Japan Equity Fund.

Six new funds were reviewed and included in Lonsec’s recommended list this year, including the Premium Asia Fund, Macquarie BRIC Advantage Fund (hedged and unhedged and the All Star Nomura China Fund.

Steve Sweeney, Senior Investment Analyst, commented, “The addition of new funds reflects a combination of continued product development for retail investors in this category and a desire to increase product choice in a growth sector for advisers.”

Observations from Lonsec’s review

Developments on the playing field

Emerging markets remain transitional economies, generally growing at rates above the global average and are often portrayed as tomorrow’s advanced economies. Governments in these markets are generally implementing economic reform programs to attract a greater level of foreign direct investment and in turn, promote increased local investment.

“If an emerging economy reaches sufficient progress, it can move towards developed status, as the likes of Singapore and Hong Kong have achieved,” commented Sweeney.

“Israel is the most recently upwardly mobile economy to make the transition from developing to developed status.”

There are 26 countries in the so called Frontier Market index covering areas as diverse as Africa (Kenya, Tunisia and Nigeria), the Baltics (Estonia and Lithuania), the Balkans (Bulgaria, Croatia and Serbia) and the Middle East (Qatar and Kuwait). These are markets characterised as having high growth rates but lower market capitalisation and liquidity than more developed emerging markets.

“Safe to say, the majority of emerging markets managers do not invest in frontier markets within their core emerging markets funds,” said Sweeney.

“However, some mangers, such as Templeton and Schroder have a considerable heritage as early entrants into these markets and offer institutional investors access to frontier markets.”

Emerging markets continue to grow in size, thereby supporting continued product development and investment choice, as evident in Lonsec’s research coverage in this area, which has increased from seven funds in 2007 to 20 funds today.

Asia – a global equities sweet spot

Asia is a key regional component of emerging markets investment making up about 55% of the MSCI Emerging Markets Index including India.  Asia emerged from the credit crunch with the strongest buy signal of any region. Importantly the rally was broad based and not just focused on China, which actually lagged many other Asian markets through 2009, although clearly the resilience of the Chinese economy was a major factor influencing regional performance.

“Indonesia and India were the standout market performers rising by 117% and 94% respectively in US dollar terms,” said Sweeney. Performance across the sector has varied depending on the investor’s belief in the sustainability of the market rally in 2009 and to some extent the portfolio exposure to these supercharged economies.

“It is a common view among both traditional global equities managers and GEMs managers that emerging markets and Asia in particularly, will serve as the engine room of global growth for the foreseeable future.”

Asia expands economic influence…

A theme evident among investment managers is that expanding Asian demand will increasingly influence economic growth in Asian economies. While exports remain important to regional growth, many expect the Chinese consumer to drive the world economy for the coming decade, thereby promoting increased regional self-reliance.

“You can often see a powerful consumer discretionary story in emerging market portfolios contrasting to traditional developed global equity managers wrestling with the dynamics of mature markets,” said Sweeney.

“Positive aspirational demographics will drive increasing consumer spending power as these economies transition from export dependence to domestic demand and consumption.”

…and in the boardroom too

There are the beginnings of a powershift in corporate headquarters from West to the East. The rise of Asia is cascading down to all levels of investment resourcing with Lonsec observing continued growth in Asian and emerging market teams seemingly at the expense of other regional teams.

“Asia and emerging markets are a leading growth segment for the global wealth management community and this increased resourcing and focus is an encouraging result for Asian and GEM investors,” commented Sweeney.

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