The growth of the world’s emerging economies often makes the headlines, most recently over the race to find the next managing director of the International Monetary Fund, with many countries arguing it is time one of the top jobs in global finance goes to a candidate from an emerging market economy.

With some pull back from investors in 2011 after the enthusiasm seen for this asset class last year, we asked the team at the Aberdeen Emerging Markets Fund for their views on the current state of play for investors.

Invest in the Aberdeen Emerging Markets Fund through Fair Investment Company at 0.00% initial charge »

Inflation

Inflation has been rising around the world and has affected emerging market countries.

“Prices have been increasing, fuelled by higher food, energy and commodity prices as well as rising wages.

“Although many central banks have been tightening monetary conditions, real interest rates are still negative or too low in many economies, so inflationary pressures are likely to continue to build,” the fund team said.

Curbing inflation

The good news, the team says, is that policymakers are ‘not too far behind the curve’.

“Many central banks, including those in Brazil, China and India have been employing various tools such as interest rate hikes and stricter reserve requirements to counter inflation.”

On top of this some emerging market currencies have been allowed to increase in value to minimise inflation on imports. In other countries the fund team believe central banks have been reluctant to act ‘for fear of hurting growth’ but this will make later intervention more painful.

They expect ‘elevated food and energy prices to moderate the pace of growth later this year’.

The fund’s portfolio

The team believe they have positioned the portfolio to ‘weather the inflationary trend’.

“From a portfolio perspective, we typically invest in companies with dominant market positions and pricing power. These holdings are best placed to negate increases in raw material prices and wages through higher prices,” the team said.

The focus is also on companies with strong balance sheets and low debt levels, meaning there is a lower interest rate burden in a rising rate environment.

Drivers of growth

Overall the BRIC markets (Brazil, Russia, India and China) are expected to continue driving growth, but other economies, namely Indonesia and Mexico, are seen as being likely to make ‘even greater strides’.

“Indonesia proved resilient to the global financial crisis, its banking sector is well capitalised with declining non-performing loan ratios as well as low and falling public and external debt levels. Apart from its favourable demographics, Indonesia could benefit from growth in domestic consumption as income levels rise,” the team said.

Mexico can benefit from its position as a low-cost gateway into the USA for developing country exports, as well as offering ‘both well-run companies and relative value, particularly among the mid-cap stocks.’

Key sectors and themes

The fund team continue to see potential in the consumer growth story.

“We favour consumer-orientated companies (including consumer discretionary, staples, healthcare, retail banks and real estate) and that won’t change,” they said.

This view is based on optimism about the ‘long-term potential for domestic demand’, while in the short term these sectors may find rising interest rates and inflation a problem.

However, central banks are seen as having credibility in responding to inflationary pressures, which means it is not necessarily detrimental to these economies, while the fund’s holdings, ‘with leading brands and market positioning’, are expected to ride out the current period of price volatility.

Invest in the Aberdeen Emerging Markets Fund through Fair Investment Company at 0.00% initial charge »

No news, feature article or comment should be seen as a personal recommendation to invest.

Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are in any doubt as to the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.

© Fair Investment Company Ltd