RARE Infrastructure Emerging Market Fund Market Commentary – February 2010
Markets remained volatile in February with the EMs under performing their developed peers further as investors again reject perceived risk (MSCI EM -0.1% vs MSCI World +1.7% in local terms). However, the majority of the EMs we are exposed to recovered some of their January losses by the month end (Shanghai +2.1% & Shenzhen +4.6%, Hong Kong +2.4%, Mexico +4.1%, Thailand +3.6%, India +0.1%, Brazil +1.7% & Malaysia +0.9%) with the exception being Indonesia which lost its January gains ending down 2.4%. For the MSCI EM as a whole, the February weakness was a result of poor performance from CEEMEA, Korea & Taiwan.
The focus for February remained on Greece and its close neighbours (Spain, Portugal, Italy). Concerns mounted re the levels of outstanding sovereign debt, their ability to pay and if needed, who (if any-one) would bail them out. We continue to believe that this issue will be resolved without default, but we do expect markets to remain volatile until there is clarity. The EMs have again suffered more than their developed peers as investors, many still wary after 2008, flee for perceived safety in the developed markets and/or cash. We would use any on-going weakness within the EMs as a buying opportunity as we continue to believe they offer a far more attractive opportunity over the medium term than their developed peers, due to
- Strong government balance sheets – many in surplus (maybe they can bail out the developed world this time)
- Recovering growth profiles (from a more resilient base) driven by domestic demand and an emerging middle class
- Contained inflation (so far) coupled with strong monetary policy which we believe will be quick to react to any spike – we expect fiscal tightening within the EMs this year (and this isnt a bad thing)
- Offerings and debt issues are coming thick and fast with significant demand
Further, the EM infrastructure companies have started reporting their FY results supporting our country view
- Corporate balance sheets remain strong
- Growth opportunities abound
- Results have beat and upgrades are coming through
By contrast to the developed markets we think the biggest concern for the EMs this year is inflation and governments management of the fiscal policy to contain this without derailing the growth story. Given this we continue to advocate that infrastructure is a great way to play the EM theme – accessing the growth while hedging the inflation risk.
