Dubai debt woes unlikely to spill over into emerging markets

Sam Mahtani, Director, Emerging Equities at F&C comments: "We feel that the fall-out from the debt crisis in Dubai is unlikely to have a deep impact on emerging market equities. Emerging market shares were hit for two days after the news broke, but prices soon stabilised and we think that investors have now discounted the Dubai issue.

Our sanguine view is based on the fact that UAE central bank has offered to ‘stand behind' local and foreign banks. We expect further announcements from the central bank and neighbouring countries should they be necessary.

Structurally, Emerging Market banks - which have better risk controls than their counterparts in developed countries - have little direct exposure to Dubai. The large debt pile has been supplied primarily by the European banks such as HSBC and RBS.

That said, the question remains as to how far this affects risk aversion globally and investors' attitude to risky assets. Heightened risk aversion traditionally causes Emerging Market equities to underperform. However, the last few years have shown that investors have become more discerning and no longer bracket together all emerging markets. While we think that investors may well be wary of countries with potential debt issues, we do not see it as a problem for the Emerging Market asset class overall.

Our sense is that some investors have used the news flow from Dubai as an opportunity to take profits. We are therefore not changing our strategy and remain constructive on Emerging Market equities on a 12 month view."