Emerging Markets will bounce back stronger than before

Stock markets across the emerging economies have not escaped the recent global equity market turmoil but the outlook for economic growth remains strong, according to F&C's Sam Mahtani.

Mahtani, who manages the F&C Global Emerging Markets Portfolio* and is deputy manager of the F&C Emerging Markets OEIC said emerging markets have fallen by some 15% since the peak in July but he believes they are likely to rally back quickly once confidence returns thanks to increasing domestic demand.

"We are focusing on those economies where there is strong domestic demand and where there are internal dynamics for growth, including Korea, Brazil, India, Thailand and Egypt. Although each of these countries is at a different point in the economic cycle, they all share a common trait, namely their growing independence from the US economy as domestic demand continues to increase. This trend looks likely to continue to drive emerging market growth in the future.

"After struggling in the shadow of rising household debt for several years, the Korean economy is showing signs of recovery as improved employment and wage growth allow consumers to pare down some of their debt and increase their spending. Corporates have also stepped up their spending as has the Korean government, particularly with regards to infrastructure projects. Holding companies GS Holdings and LG Corp have both made moves towards restructuring their business models to improve efficiency and shareholder value," said Mahtani.

But the investment opportunities from rising consumer demand are not limited to Korea. According to Mahtani, in recognition of rising consumer demand the Indian Government has committed some $300bn to infrastructure projects over the next five years, which in turn will drive employment, demand for basic commodities such as steel and cement and most importantly for investors, provide a wide range of investment opportunities among corporates with exposure to the infrastructure story.

"With a daily average power deficit of 12-15%, the Indian government has recognised the need to increase energy spending to improve living standards, particularly in the rural areas. India's growing and increasingly affluent population is boosting demand for power and one of our favourite companies BHEL, which builds power plants, should benefit," said Mahtani.

"In Brazil, companies are also taking advantage of the growing demand for energy. Tractabel Energia is a very well managed company with a robust franchise - Suez is a majority stakeholder. It has a good cashflow profile and a strong dividend yield. We also like clothing retailer Lojas Renner, which has a strong franchise with its network of stores and its fast growing Internet operations. In Brazil like elsewhere the main economic driver is the pick-up in consumer demand, which has been given an additional push by interest rate cuts."

Elsewhere, both Thailand and Egypt present great value opportunities. The political turmoil in Thailand following the military coup last year has raised concerns amongst investors, including F&C, over the country's future but a transition back to a democratic elected government is widely anticipated over the next 12 months.

"As one of the cheapest markets in Asia, Thailand presents a great value story. Earnings are very depressed at present but we believe that these will turn around as the country's political situation stabilizes and consumer confidence returns. We like Total Access Communications in the mobile telecoms sector as the company is cheap and showing good earnings growth," said Mahtani.

Egypt also presents good value for investors and the country's economy is receiving a lot of support from the rising oil price, high levels of tourism, privatization and increased government spending. Commercial International Bank, is one of the country's biggest and better managed banks and has a lot of potential to increase its loan book as consumer demand picks up.

"In Egypt as elsewhere in the developing market economies, the key factor driving growth is domestic demand. Although we think there could be another 5-10% downside to emerging markets in the short term if risk aversion levels increase again, their growing maturity means a slowdown elsewhere in the world will have a limited impact on the real economic fundamentals of emerging markets. Strong domestic demand is a secular story and one which is here to stay," he concluded.

*The F&C Global Emerging Markets Portfolio is a sub fund of the F&C Portfolios Fund SICAV Umbrella.