What should investors do about their emerging market holdings asks Jeff Prestridge

3rd February 2014

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HOW sentiment in investment markets changes so quickly. Jeff Prestridge, personal finance editor of the Mail on Sunday and Mindful Money contributor asks what investors should do now. One thing for certain – avoid investing in faddish acronyms like BRICs and MINT.

This time last year, investors couldn’t get enough of emerging markets. Statistics from the august body that is the Investment Management Association shows that in December 2012 and January 2013 global emerging market investment funds were selling like hot cakes.

Indeed no other investment theme was exciting the retail investor more. For example, in December 2012, global emerging market funds attracted more ‘net’ sales – gross sales after repurchases – than any other sector, bond or equity based. Net sales totalled £252 billion, nearly four times those for UK equity income funds with all their allure of income and capital return in a low interest rate environment.

Fast forward to December just gone and the IMA statistics could not be more contrasting. In the month leading up to Hogmanay, retail investors withdrew a net £69 billion from global emerging market funds. Only UK corporate bond funds suffered a greater desertion. Net sales of UK equity income funds, meanwhile, totalled £115 billion.

In a way the sales figures for emerging market funds demonstrate the inherent characteristics of this asset class – extremely volatile and high risk high reward. It’s not an asset class for those lacking investment nerves of steel.

Certainly, the omens for emerging markets do not look good despite all the hype given to the new engines of emerging market economic growth – the so called MINT economies of Mexico, Indonesia, Nigeria and Turkey.

Key emerging market economies, led by India, South Africa and Turkey (yes, a quarter of the MINT story), have all recently raised interest rates to stop runs on their currencies.

China’s relentless pursuit of economic growth also looks as if it could be unhinged by an alarming growth in credit, a bubble that could burst at any moment. And we all know what happens when credit bubbles burst (who can forget 2008?) Add in the negative impact on emerging markets of the US Federal Reserve’s decision to start reducing – ‘tapering’ – its programme of quantitative easing (a process that is sucking cash out of emerging markets and back to the US) and you can see why the doom merchants are in the ascendancy.

Indeed, when an emerging markets fund manager of the standing of Richard Titherington (head of emerging market equities at investment powerhouse JPMorgan Asset Management) stands up and says he hasn’t seen such a degree of pessimism about the asset class for many a year, you know things are grim. Very grim. Fund managers rarely talk down their sector.

So, what should investors do?

Dumping emerging market funds now doesn’t seem wise although the current turmoil may be too much to stomach for some. If you can’t afford to take further losses, get out (you shouldn’t probably have been in the asset class in the first place).

Long term investors should hold on, especially if their emerging market exposure is not out of kilter with their overall investment risk profile.

Investing new money into the sector takes bravery – especially given Titherington’s comments and those of Fidelity’s chief investment officer Dominic Rossi who talks about the tide ‘going out of emerging markets’.

If you are hoping to buy while market sentiment remains awful, then spread your purchases over a few months rather than invest all in one go.

And don’t get sucked into gimmicks. Forget funds labelled as BRICs (standing for the economies of Brazil, Russia, India and China) or MINTs (rest assured, they’re coming!). And be wary of single market funds or regional funds unless you’re prepared to play roulette with your investments.

Instead, invest in a global emerging markets fund that’s been around for a while and withstood the market traumas that constantly challenge this asset class. Investment houses such as Aberdeen, First State, JPMorgan Asset Management all have emerging markets traction. They won’t protect you from further emerging markets turmoil but they are experts at extracting long term returns from this most volatile of investment sectors.

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