(August 13, 2012) — Emerging market fund managers are shifting from the traditional consumer growth story for returns, as investors have pulled out developing nations and created a vicious circle of losses by selling on downward movement.
Funds that had previously bet on the rise in general domestic consumption in emerging markets have moved into discretionary and technology stocks to reflect changes in the local markets, research from S&P Capital IQ said this week.
China has seen the largest movement of this kind, the research teams at S&P said, with fund managers moving “sizeable allocations” to IT and telecoms, and other internet-related stocks, most of which have shown strong growth over the past 12 months.
The research note from S&P Capital IQ said: “Despite the vast majority of managers remaining confident that emerging economies will continue to grow at a faster rate than their developed market counterparts, the period represented a period of significant risk aversion for equity investors.”
Uncertainty about economic recovery in the Eurozone and the presidential elections looming in the United States fuelled some of this risk aversion, S&P said.
S&P reported that investors pulling assets out of emerging market funds had in some cases, exacerbated poor performance, as managers were forced to sell into falling markets to meet client redemptions.
The choices made by the emerging market consumer is likely to play on the minds of investors and fund managers for some time yet, Raiffeisen Capital Management said today.
A note from the European asset manager said: “In recent months, prices for corn, wheat and soya have already risen sharply and in light of the poor harvest prospects it is more likely that prices will continue to rise rather than fall. As food accounts for a particularly high proportion of consumer spending in the Emerging Markets and food price developments are reflected strongly in inflation rates, this could result in numerous challenges for the emerging market economies.”
Higher spending on food reduces the income available for spending on other consumer goods, and resulting inflationary pressure makes it more difficult for central banks to stimulate the economy by cutting interest rates, Raiffeisen said. “Finally, it is important to recall that massive increases in food prices threaten the very lives of many people in the emerging markets and can thus also have a major impact on domestic politics.”