EMERGING MARKET SEGMENTS

When investors think of emerging markets they all too often think of China and India, and an Asian bias. But there is much more, and the different geographical segments are:

Asia (parts of)
Latin America
Eastern Europe
Africa
Middle East

China and India are undoubtedly global powerhouses, while still strictly speaking emerging markets, and they are considered in detail elsewhere.

The other two major players are Brazil and Russia, and you can focus just on these four countries via BRIC funds. The BRIC economies account for about 30% of world GDP, and over 40% of the worlds population. The largest fund focussed on this block is the Allianz BRIC. The current balance of the fund is towards the Brazilian and Russian markets, which look better value. Jupiter believe that Russia has shorter term attractions due to lower valuations, but that India has a longer term edge due to the younger population.

Latin America

Strong commodity prices plus solid domestic demand have underpinned a boom across Latin America. Recent elections in most countries have also enabled a smooth transition of political power, providing a stable background to the positive economic environment. Historically it was huge debts and soaring inflation which put paid to prospects, but the debt/GDP ratios are substantially lower than a few years ago, and robust growth has been achieved largely with a reasonable level of inflation.

Brazil has historically been a commodity story, but domestic demand is now grabbing attention. After years of hyper-inflation, Brazil now enjoys a far more sober rate of about 4%, which has also allowed interest rates to fall to levels where consumer borrowing is realistic, and public debt is dropping to acceptable levels. Agricultural commodities are going to be a big boost for Brazil. For example, there are vasts tracts of land that can be used to grow crops that can be turned into ethanol. More broadly it has an abundance of the four major commodities of which the world is short, it has the best water table in the world (vital for expanding agriculture and a growing population), a pool of cheap labour, and is (relatively) politically stable. It also doesn't have an exposure to the debt problems that are now spooking much of the rest of the world. With more reform it can start to fulfill its potential, with growth rates closer to those of the other BRIC nations

There are a small number of Latin American funds and we are drawn to Neptune Latin America. Although the most recently launched, it has 70% in Brazil, a small amount in Mexico and the balance in cash looking for cheap buying opportunities as global volatility persists. Undoubtedly higher risk, but with considerable potential.

Eastern Europe

Improved corporate governance has been a key issue, as well as robust earnings growth, and merger and acquisition activity as a result of EU convergence. Political risk has also improved, though in Russia the flamboyant Putin, while worshiped domestically, can be a little too enigmatic for some international investors.

For sure, growth in Russia is not just about commodity windfalls. Retail sales recently grew 16%, as unemployment fell (to 5.7%, the lowest ever recorded), and wages grew by 14% in real terms. Deposits and liquidity are abundant, yet it remains one of the cheapest major stock markets in the world, with a key negative being political risk associated with Putin and his successor as President (Medvedev).

For those wanting a focussed Russian exposure, the Neptune Russia and Greater Russia has excelled.

Africa

This continent (once described as "the hopeless continent" by the Economist) has intriguing potential, with abundant natural resources such as gold, copper, platinum, iron ore, bauxite, coal, oil and gas, as well as soft commodities, like cocoa, coffee and sugar. Africa has therefore benefited substantially from booming commodity prices of recent years. This, combined with large scale debt reduction programs and regulatory reforms, will lay a foundation for sustainable long term growth.

Massive investment in infrastructure is required to keep up the momentum, and, if this takes place, this in turn will create new job opportunities, and new wealth to support growing domestic demand.

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