Inflationary pressure rises but earnings expectations positive

Inflation is now well established as a feature to watch across emerging markets, driven by higher energy and food costs.

While oil is now trading off the peak levels reached in mid-July, the Centre for Global Energy Studies believes that not enough oil is being produced to meet world demand. Food costs have also risen, with a combination of demographic, meteorological and structural factors contributing to record prices for wheat, rice and soya in the last six months. Meanwhile producer prices have been rising faster than consumer prices for some time. Now we are seeing the increases passed by companies onto the buying public.

According to Chris Palmer, Head of Global Emerging Markets at Gartmore, "This environment makes it critical for investors to identify the companies that are better-placed within their industries to manage price pressures. It is also important to focus on those countries that have greater capacity to absorb commodity price inflation, and those that will suffer a deteriorating balance of payments position as a result." However he does not believe the situation is comparable to the 1970s, when a combination of high energy prices, production shocks in food and poorly managed monetary policy led to economic crisis. This time, many central banks in emerging markets have raised interest rates sharply in response to rising price pressures.

Chris highlights that earnings expectations for companies operating in emerging markets have moderated in 2008, but are still favourable. "In spite of the more challenging operating environment, we expect corporate earnings to grow by around 15% in 2008. In Brazil and Russia, the figure could be higher. This compares very favourably with valuations at the moment."

The Gartmore Emerging Markets Opportunities Fund and the Gartmore SICAV Emerging Markets Fund are overweight in Brazil and Russia. The Funds outperformed the sector average by over three full percentage points over the three months to June. In the last five years, the Funds' average return has exceeded 23% per year.

For more information, visit gartmore.com