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BLOG: Looking beyond the emerging market sell-off

Written by: Darius McDermott
One of the biggest issues impacting global markets this year has been the so-called emerging markets sell-off. Should investors be concerned?

We are used to being told that emerging markets in Asia, Latin America and Eastern Europe represent the ‘riskiest’ part of a portfolio but, with idiosyncratic problems in the likes of Turkey, Brazil and Argentina, at the moment should long-term investors be worried?

For starters, we should take a look at the reasons behind why professional traders have been selling down holdings in currencies, stocks and bonds. Much of this is actually to do with the antithesis of an emerging market, the US.

The dollar has been trading relatively strongly this year on the back of a healthy US economy and rising interest rates, and this has meant some money has been taken out of emerging markets and back into the greenback. Why take on risk when you can get decent returns from perceived ‘safer’ currencies or stock markets?

Opportunistic traders can be fickle by nature, meaning money can flow out of a country or region as fast as it flows in, but is the current trend rational? Many developing countries certainly have their problems, particularly in terms of debt.

Problems in Turkey and Argentina have made the headlines this year, both economies weighed down by a combination of weak governance and high dollar debt. China, the pin-up for the Asian miracle, has also long been known to be highly indebted while also impacted by the threat of trade war with the US.

I have a positive view on emerging markets over the long-term. The opportunities for growth in the future are very exciting and we have been topping up our holdings over the course of this year.

Whatever the forward journey, a good stock-picking manager can help navigate you through the tough times. Take for example Lazard Emerging Markets fund, headed up by James Donald for over 20 years. His consistent approach is to find ‘unloved’ and undervalued stocks. Understandably, with this contrarian approach the fund has had a difficult 2018, but during Donald’s tenure it has outperformed the majority of its peers. In the three years to 4 September 2018, it delivered a total return of 53%.

For those investors wishing to invest on a regional basis, Latin America could well be worth a look. If I’ve learned anything over the past 20 years or so it is that if you can invest when everyone else is fearful, there is a good chance you can make money over the long-term. It can feel very uncomfortable doing so though and your investment may fall in the short-term, so it requires more nerves of steel.

Two of the biggest economies in Latin America are Brazil and Argentina. Both have been under the cosh recently. The Brazilian economy grew by just 0.2% in the second quarter of the year (April to June), while unemployment stands at around 12%. However, Brazilians go to the polls in October, and there is hope for reform under a new president. Argentina has seen its currency, the peso, lose more than 40% of its value against the dollar this year and inflation is rampant.

Aberdeen Latin American Equity fund is one of our favourites in the sector, with the team taking a customary cautious approach that lends itself particularly well to these volatile and

less-researched markets. More than half of the fund is currently invested in Brazil, with the top-10 holdings dominated by financials and consumer names.

Darius McDermott is managing director of Chelsea Financial Services and FundCalibre

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