Despite a challenging year so far for performance, now could be the ideal time to start purchasing emerging market equities, according to Jeff Chowdhry, head of emerging market equities at F&C Investments.

Despite a challenging year so far
for performance, now could be the ideal time to start purchasing emerging
market equities, according to Jeff Chowdhry, head of emerging market
equities at Investments.

Over the past 12 months, emerging
bond and equity markets have lost ground against their developed country peers,
with Brazilian and Indian stocks sustaining double-digit sterling denominated
losses. This has been in marked contrast to Japan,
the US and Europe
ex-UK, which posted returns of between 20 and 30 per cent.

Chowdhry said that part of the
reason behind the sell-off was because investors were recognising that emerging
markets have much more work to do in terms of structural reform. He believes
that for these economies to regain their previously impressive growth
trajectory, infrastructure and financial systems need to be upgraded and more
progress needs to be made on stamping out corruption.

"Nowhere are the growing
pains of transition more apparent than in China.
Growth in the world’s second largest economy has slowed in the last eighteen
months as the country’s leadership has committed itself to diverting emphasis
from exports and infrastructure projects to servicing increasing demand from
the domestic consumer. Emerging markets are no longer exclusively the workshops
of the West and now need to cater for their own increasingly aspirational
populations," said Chowdhry.

Stock selection

The perception of a cyclical
downturn in emerging markets has pushed equity valuations down to very cheap levels
and has also brought about a sharp depreciation in a number of emerging market
currencies. Chowdhry said that this represented an excellent buying
opportunity, but it was important investors were selective.

"The sectors that fuelled the first emerging markets boom probably won’t
be driving the next. Caution needs to be exercised, for example, with
commodity companies. China’s
determination to restructure has seen its demand for raw materials slide, and
this has contributed to the downturn seen in the big producer nations such as Brazil, South
Africa and Russia," said Chowdhry.

Chowdhry
is optimistic that stock markets can
deliver double digit gains next year and believes that investors can take encouragement from recent data.

"Emerging countries are brimming
with high-quality companies, many of which
have been hit by indiscriminate selling as investors have withdrawn funds from
the asset class," said Chowdhry.

"The
HSBC Emerging Markets Index, which is a gauge of business sentiment derived
from the influential PMI surveys, reported that business activity across global
emerging markets in October had expanded at its fastest rate since March. This
has found some corroboration in the fact that the latest quarterly growth
figures for India
were better than expected," added Chowdhry.