Taking stock from emerging market story

Last year saw record inflows of $95bn (E70bn) into emerging markets. But investors in developing economies, fearing Chinese overheating and contagion from political unrest in Egypt to other parts of the Middle East and North Africa, withdrew $7bn in the last week of January alone. According to cross-border fund consultancy EPFR, they are switching their affections to the US, Japan and Europe.

Is this junction just a blip in the long-term story, or does it mark a sea-change in European investors’ attitudes to developing economies?

At Deutsche Bank, private and business banking customers are being encouraged to look increasingly at new homes for their money, such as US equities. While emerging markets are still considered an engaging, long-term story in the bank’s Frankfurt product factory, they are no longer being called so aggressively by investment staff and client advisers.

Banks and asset managers are also talking about a “fundamental shift” in client preference for emerging markets, with several suggesting a long-short approach can also benefit investors in falling markets.

There are plenty of voices in Geneva and Zurich warning about over-optimism in the current climate, with more pain to come. The fast growing Reyl family-owned group is suggesting private clients should stay more on the sidelines during 2011, reflecting concerns about China’s real estate bubble in particular.

Reyl, like Deutsche and Man subsidiary GLG, is also planning a long-short emerging markets fund for the increasing number of private clients who think: “Yes, I believe in the emerging market story in the long-term, but I am not really up for full exposure at the moment.”

French stalwarts BNP Paribas are suggesting private clients in multi-asset portfolios have strong exposure to equities in the first half of the year, while reducing excessive bond weightings. Emerging market, and increasingly, European equities are preferred by the French bank over US opportunities.

Still persuasive

There is appreciation at the bank that many investors are making tactical adjustments to their long-term views, but the developing world story is still a persuasive one, with most clients under-exposed to it, believes Chris Jeffery, economist at BNP Paribas Investment Partners. Despite their critics, China’s infrastructure projects are leading to vast improvements in the productivity of the economy, he advises.

In particular, Mr Jeffery points to the raft of Chinese high-speed rail connections nearing completion. “Beijing to Shanghai by rail currently takes 10 hours. By June this year, it will be cut to four hours. These are not ‘roads to nowhere’. If that is not a productivity improvement, then I don’t know what is.”