Investors turn their backs on emerging markets as returns disappoint
Formerly fashionable emerging markets have fallen from favour with investors, with an eye-stretching £185m being withdrawn from these funds in March.
6:00AM BST 19 May 2011
Formerly fashionable emerging markets have fallen from favour with investors, with an eye-stretching £185m being withdrawn from these funds in March.
The net outflow for the month, the last for which the Investment Management Association (IMA) has figures, compares with inflows of £337m into strategic bond funds, £136m into North America and £96m into UK Equity Income funds during March, the last month of the Isa season.
One reason emerging markets – such as Brazil, Russia, India and China – have gone out of fashion is that returns during the last year have lagged behind more developed economies.
According to independent statisticians Financial Express, unit trusts and open-ended investment companies (Oeics) invested in continental Europe delivered average returns of 17pc over the last year while those in Britain returned 16pc and America managed 10pc.
By contrast, China lagged behind with total returns of less than 5pc over the last year, while Brazil delivered less than 3.5pc and Indian funds shrank by more than 4pc.
Despite dismal short-term returns, some experts argue that investors cashing out of emerging markets today may be making an expensive mistake.
John Kelly of independent financial advisers Chelsea Financial Services said: "There will always be plenty of hot money sloshing around the markets as short-term investors try to capture opportunities between the margins of asset class and sector volatility.
"But investors should consider the context of their investment before jumping ship. The investment case for emerging markets is underpinned by a long-term projection of sustained economic growth with a few wobbles along the way. If an investor gets the jitters when encountering the first bump on the road, this investment was probably not the right one for them in the first place."
Similarly, Richard Saunders, chief executive of the IMA, said: "If you're going into the stock market you need to have an eye to the long term. The best way to accumulate a long-term nest egg is by regular saving over a long period of time – in other words, getting into the savings habit.
"The sums you need to accumulate to fund a comfortable retirement can seem intimidating in isolation, and for most of us the slow and steady strategy is the most realistic way to get there. Regular saving has the added advantage of providing a way to handle a volatile market that can go up and down in the short term in unpredictable ways.
"Investing a lump sum at one time leaves you exposed to the vagaries of the market, which may be unusually high or unusually low on that day. But investing a little every month helps to smooth out these ups and downs and deliver a steadier return over time."
For now, fear has replaced greed as the dominant factor in investor sentiment but Ash Misra, head of investment strategy at Lloyds TSB Private Banking, predicted that those willing to take a longer view might profit from doing so.
He said: "Once sentiment swings back and the valuation imbalances between developed and emerging markets disappear, investors will focus once more on fundamentals. The emerging market advantages of a younger demographic, stronger banking systems and healthier private sector balance sheets are compelling.
"Also, emerging government policies including fiscal conservatism, lower taxes and reduced spending will further buttress the case for emerging markets. In time, money should flow back into emerging markets as the relative valuations between the two markets equalise and the fundamental strengths of emerging markets will be attractive once again."