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Time To Look Again At Emerging Markets in 2012?


The flight to safe havens in the latter part of 2011 hurt emerging market equities, but strategists believe it may be time to pick up some devalued emerging market stocks.

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“The emerging markets have got much more ammunition to deal with economic slowdown,” Ewen Cameron Watt, Chief Investment Strategist at BlackRock Investment Institute, told CNBC.

He described China as “the last Keynesian standing” and predicted that its leaders would tackle a slowdown in exports by launching more internal job creation projects rather than helping the euro zone recover.

The MSCI Emerging Markets Index fell by around 20 percent last year as many investors favored developed world companies with an emerging markets focus, rather than companies based in emerging markets such as Brazil, China and India. Cameron Watt believes this will reverse in 2012.

“If you can buy emerging markets equities at 30 percent cheaper, why not do that?” he asked.

Corporate governance is one of the perennial issues facing investors in emerging markets, which often have different standards to the developed world.

2012: Two Different Scenarios

Cameron Watt believes the risks of investing in a country with laxer standards are already factored into emerging market shares at their current levels.

Blackrock Investment Institute predicts modest growth for the US in 2012, and thinks Europe will continue to muddle through.

Mark Tinker, Global Portfolio Manager at Axa Framlington, was more cautious about emerging markets and told CNBC he was “not yet sure” if there was sufficient risk premium in the valuation of emerging market equities.

His fund is currently around 50 percent invested in the US, and this is “most likely” to rise.

Expectations for US corporate earnings have risen after several sets of better-than-expected economic data. Cameron Watt believes that they may have risen too far, and that expectations for US corporate earnings are higher than they should be for the first time in 4-5 years.

“We just need some stability, please, then we can return to fundamentals,” Tinker said.

He added that the chance of major policy changes as countries including the US, France and Taiwan undergo elections was a “big concern” for him.

“There’s a lot of politics this year and politics makes policy decisions quite tricky, just at a point where we need very clear policy decision making,” Cameron Watt said.

He described the current situation in the markets as “stagnation.”

“One day risk on, one day risk off – nobody can make sensible decisions with correlations close to one and things zig-zagging,” he said.

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