The Fed's QE2 program helped boost risk assets especially commodities. But one fund manager says emerging market stocks have been left out of the rally and that is about to change.
According to Aadil Ebrahim, Managing Director of Bowen Capital Management, Chinese and Indian stocks have underperformed the S&P 500, oil and silver markets from late August 2010 to early May. The MSCI China Index rose 11.4 percent and India's Nifty increased 7.9 percent, compared to a 26 percent gain for the S&P 500, a 35 percent gain for oil and a 100 percent gain for silver.
"If liquidity had been pumping into these markets, you would have seen China and India outperforming the S&P significantly," Ebrahim said.
Ebrahim now believes the end of QE2 is going to be a big boost for emerging markets primarily because it would lead to an outflow of money from commodities, which will help ease inflation in these countries.
"You will see better margins, better profitability from these companies that are buying commodities and selling to the consumer," he said.
According to Ebrahim, investors should be building up positions in the emerging markets, which have been particularly dogged by inflation, such as China and India.
His fund owns consumer stocks such as Chinese diaper and tissue maker Hengan International, which is among his favorite picks. The stock has lost 15 percent since October but is up five-fold over the last 5 years.
"A lot of these stocks which are beaten down significantly over the last couple of months, we are starting to look at quite seriously and valuations are looking attractive because you are seeing some better margin visibility going forward." he added.