Domestic consumption to drive growth in global emerging markets

Global emerging markets fund managers say that the growth story going forward will be the expansion of domestic consumption driven by increasing wealth and the rise of a middle class, according to the latest sector review published by Standard & Poor's Fund Services.

"The most noticeable trend within our sector review was the growing importance of the domestic consumer," noted S&P Fund Services lead analyst, John Monaghan. "This has been consistent across the three blocs covered," he added. "In addition, several managers believe this trend has a long way to run, underpinned by the rise of a middle class in emerging markets."

Several of the fund managers interviewed held overweight positions to the consumer sectors, with a slight preference at the margin for staples over discretionary names. The team at Aberdeen, led by Devan Kaloo, was among the most optimistic with around 20% combined exposure to consumer names compared to 12% for the MSCI Emerging Markets index.

Barings's James Syme holds Russia as his largest overweight and is most positive about the domestic economy and the Russian consumer. The team at Skagen, who manage the AAA rated Kon-Tiki fund, believe Asia will lead global economic growth and that global imbalances will continue to be reduced by increasing consumption in emerging markets and raised savings rates in industrialised countries.

Overall, the view was positive for emerging markets, although most managers felt a rally of the same size and duration as that experienced early in the second quarter of 2009 would be highly unlikely. Emerging markets funds continued to benefit from sizeable flows and very few of the funds covered experienced significant net outflows. Total inflows into global emerging markets funds totalled $83bn in 2009, with a further $18bn to the end of June 2010. This contrasts to outflows of $50bn in 2008, according to figures from EPFR Global.