Emerging market equity values compelling

Despite stable growth and low interest rates in emerging markets, Baring Asset Management (Barings) believes that equities are still lagging and valuations remain attractive, particularly in Asia. The manager of the Baring Emerging Market Income Fund, which aims to achieve double digit growth by investing in emerging market debt securities, emerging market equities and their associated currencies, has allocated exposure to Asian equities in order to take advantage of attractive valuations.

Ece Ugurtas, manager of the Baring Emerging Market Income Fund, comments: “Following recent weakness in Asian share prices, we established an allocation to Asian equities last month, bringing our total equity allocation to 7.5%. Domestic demand within Asia remains robust and, despite current volatility, we believe companies are well positioned to benefit from domestically generated robust economic growth, and that share price valuations remain attractive. We are confident of the potential for emerging market equities and are prepared to add to our equity allocation on further weakness.”

Ugurtas is preparing to move further away from the fund’s previously defensive allocations - 65% in non-emerging market assets - as further opportunities arise in emerging equity and debt markets. She believes there is a strong case for emerging market debt, particularly in countries with strong economic fundamentals and robust external balances such as Brazil and Mexico.

Ece Ugurtas continues: “We believe local currency debt offers attractive income opportunities, as investors appreciate the sound long-term prospects for emerging economies, including potential for currency appreciation, as well high nominal and real yields available from these investments. As an example, the yield on Brazilian 10 year local denominated bonds is currently 13.3%, compared with just 5.7% on USD-denominated Brazilian bonds.

“External financing positions in emerging markets have improved greatly in recent years, public sector financing is also shifting from external debt to local markets and governments are buying back external debt and issuing local debt - all of which contributes to the case for local currency denominated emerging market debt.”

Barings believes the medium to long-term case for emerging market equities is extremely positive, as industrialisation provides a secular stimulus for economic activity. Ugurtas explains, “Higher soft and hard raw material prices may be hurting western consumers, but on the other side of the world, EM exporters are big beneficiaries. Secondly, huge infrastructure investment is required to match the pace of demand across EM particularly in the areas of power and transport. Thirdly, investors should be looking for internal consumer driven growth stories in the emerging economies rather than at their western orientated export companies.”

The $200 million Baring Emerging Market Income Fund aims to achieve double digit growth by investing in emerging market debt securities, emerging market equities and their associated currencies. The fund returned has returned 16.6% p.a. since inception in December 2006.

Ugurtas concludes: “We believe that the combination of local currency emerging market debt, and opportunistic exposure to emerging market equity is attractive to investors looking for income and the potential for capital growth with controlled volatility.”