Revitalised interest in emerging markets as US growth slows

Expectations of slower growth in the US and further interest rate cuts in the pipeline in 2007 have stimulated investor interest in assets in emerging markets. US consumer confidence has slipped to its lowest level for two years, but emerging markets are experiencing a period of strong growth, fuelled by rising investment and consumption.

The differential between the returns available in the US and elsewhere across the globe has led to the appreciation of currencies such as the Brazilian real. According to Chris Palmer, Head of Global Emerging Markets at Gartmore, “Investors’ preference will be for faster growing economies, and also for a lower allocation to the US dollar. Investors will get all of this by buying emerging markets.”

In contrast to the credit crises of the 1980s and early 1990s, many emerging economies are now underpinned by strong balance sheets and show primary budget surpluses (i.e. before debt repayment charges). Inflation-targeting central banks are the norm. The perception of reduced risk, combined with a strong corporate earnings outlook, has resulted in net inflows into emerging market equity funds of $8.2bn in the last month, according to EPFR Global.

Gartmore’s Emerging Markets Opportunities Fund returned 6.17% in the three months to 31 August, outperforming the sector average by more than three percentage points. It returned in excess of 40% over the last twelve months, and ranks in the top decile relative to its peers.