F&C’s GEM Equity team shifts focus to domestically strong regions

Inflation continues to be the key issue in many global emerging markets, particularly India, China and Brazil, however F&C's Emerging Markets Equity team expects a peak in the next few months.

Mike Sell, a fund manager in the team, commented: "In our view, inflation should dip across several emerging markets as food and soft commodity prices peak, improving sentiment in the equity markets, and a single-digit P/E on 2012 earnings indicates good value. With that in mind, the team has renewed its focus on those countries where we see increased domestic confidence, robust demand and attractive valuations."

The team has subsequently identified several areas of opportunity in keeping with this focus, such as Poland, Brazil, Turkey, China and Indonesia.

"Poland'seconomy continues to be stronger than others in the region due to strong domestic demand. The central bank has proactively tightened rates and domestic pension funds are sitting on cash ahead of issuance later this year. Similarly, Turkey is seeing strong domestic demand and high credit growth indicates upgrades to GDP growth in the near term," Sell continued.

China and Indonesia remain the key overweight positions in the Thames River Emerging Asia Fund - which Sell manages and which was awarded a new ‘A' rating from S&P following a review last month - as in both cases Sell believes the concerns on inflation will fade.

"Inflation in China is close to a peak but interest rates are unlikely to fall significantly before the change in leadership in 2012. We believe valuations are attractive relative to history and the region, earnings appear robust and we have a number of interesting stock ideas. Furthermore, the broad-based economic recovery in Indonesia is continuing apace. At a sector level, the fund remains overweight the consumer discretionary, financial and energy sectors, particularly coal. Overall, in our view growth remains both positive and significantly above OECD countries, and we are very confident that the region will not suffer a ‘hard landing'," he concluded.