Growth hot spots

This suggests that there is a value opportunity for investors brave enough to delve into emerging markets at this point of maximum pessimism. So we've investigated conditions in each of the 'Bric' economies and suggest some companies that will give exposure to those countries. We also look at other emerging markets and how best to gain exposure to them.

We'll start with China. It's the biggest conundrum of all the emerging markets; a notional market economy that is effectively run by the country's ruling Communist party. It is already the second-biggest economy in the world, having overtaken Japan in 2011, and has all the tools in place to become the biggest economy in the world. And all this has been achieved at what is still an early stage of its economic development. Such is China's growing influence on the wider global economy that talk of a slowdown in its growth sends shivers through most of the developed world.

The Chinese government has been trying to manage a slowdown in its economy in response to the surge it created in 2008-09 following the global economic slowdown. In fact, the government is now aiming for a more sustainable level of growth at around the 7.5 per cent level rather than the 10 per cent-plus levels we have seen in the past. It also hopes to continue to rebalance the economy away from export-led growth to domestic consumption. Thus far, the government's attempts to cool the economy and reduce inflation appear to have worked as growth has been pared back towards the 8 per cent level and inflation has fallen from a high of 6.5 per cent in July 2011 to 3.5 per cent more recently. This gives scope for the government to use stimulus measures should the economy fall below target without threatening a blow-out in inflation.

Investors have been spooked by the recent slowdown in the Chinese economy but China specialists are beginning to see value in the market. Henderson Asian Growth Trust manager Andrew Beal is enthusiastic about China right now: "The breadth and depth of the Chinese market is so much better than other Asian markets. It's not a bad time to be investing in China. The key will be government policy but we're getting a landing now in terms of a slow down. I would expect GDP growth to trough out and the second half to show decent growth."

Mr Beal believes that across Asian emerging markets as a whole we are close to "fundamental buying levels". "The MSCI Asia ex-Japan index is back to 1.5 times book value, it was 1.3 times last October and the floor for the past 16 years has been one times. Another 10 per cent from here is hold your nose and buy time. We're approaching the level where you hunt out companies that you've been watching for some time. You have to be prepared to buy when there is a lot of red on the screen," he said.

The key for China now is how well the authorities can manage the switch to a domestic consumption-led economy while maintaining growth rates and with it the improvement in the quality of living for the majority of its people - a transition it is equally important to manage effectively.

How to gain exposure: Famously, Anthony Bolton has not yet been able to transfer his Midas touch from the UK to China via his Fidelity China Special Situations investment trust and we remain cautious on his prospects of enacting a turnaround in the short term. Funds with better track records include Aberdeen Chinese Equity, First State Greater China Growth, Neptune China, Baillie Gifford Greater China and Threadneedle China Equity. But some of the most popular funds of recent years have effectively 'soft closed' to new investors.

Gaining exposure to China through UK-listed equities is tougher and many of the UK-listed Chinese equities have been disappointing performers. Proxies for Chinese growth do exist. Four stocks that offer different angles on China's growth are meat processor Cranswick, Chinese domestic oil and gas supplier Fortune Oil, Macau Property and industrial machines maker Fenner. Investors with access to US markets can buy companies such as Baidu, the 'Chinese Google'.

India is currently creating the most concern among emerging markets investors and this week Standard & Poor's warned that the nation could become the first of the BRIC economies to lose its investment-grade status. India's equities market has always been more expensive than other emerging markets and that means that in tough times such as these it falls further. It is the economic indicators for India that are causing concern. India's growth rate has slowed rather markedly after three years of 8 per cent-plus growth, in response to tightening of monetary policy by the Indian government as it attempts to ease inflationary pressures within its economy. In fact, India's most recent GDP figures showed growth of just 5.3 per cent in the first quarter of 2012, its worst quarterly performance since 2003. Unfortunately, unlike China, inflationary pressures have not eased as markedly with wholesale inflation running at 7.2 per cent in April. In India, where a significant proportion of the population live in relative poverty, the impact of food price inflation is particularly keenly felt.

Even professional India investors are circumspect about its short-term prospects. Manish Bhatia, the manager of Schroders Indian Equities, said: "Almost everything that could go wrong within an economy went wrong in India in 2011. Inflation soared, corruption scandals erupted, and the government went through a period of policy paralysis. However, in 2012 India's markets got off to a stunning start, surging ahead of the wider region by a strong margin. But just as the rally started to seem too good to be true, it proved to be just that.

"We believe the markets bounced too high, too fast, and the slump we've seen more recently may be a sign that we are in for a few more turbulent months for India. While this does not mean that a genuine recovery is not on the horizon, it does mean that investors may need to hold on tighter for a little longer. Our view is that a more sustainable rebound is likely to occur in the second half of this year but, until then, Indian equities are likely to endure a few more twists and turns."

India has promising long-term potential if it can harness its vast resources. And the fact its growth is less export-led suggests it could be more sustainable in the long run. But progress in terms of changing financial regulations and encouraging inward investment in the country remains glacial and the levels of bureaucracy are staggeringly complex.

How to gain exposure: There are fewer UK-quoted funds with direct access to India, but more Indian equities trade in London than Chinese ones. India-focused funds have less of a track record, but among those with three years-plus are First State Indian Subcontinent, Aberdeen Indian Equity, Fidelity India Focus and Jupiter India.

The larger UK-listed Indian companies such as Essar Energy and Vedanta Resources have had a torrid time of it lately. We prefer smaller companies such as Myrah Energy, a play on growing Indian wind energy, and KSK Power Ventur, which is developing power stations across the country. Both companies are expanding rapidly at a time when power cuts and brown-outs are an increasing problem and power demand outstrips supply. London is also home to a number of Indian giants who trade Global Depositary Receipts (GDRs) including Ranbaxy, Reliance Industries, Tata Steel and Suzlon Energy.

Latin America's largest country in terms of both land mass and population is also probably its richest in terms of natural resources. Indeed, Brazil's Vale is one of the major players in the global commodities game and oil giant Petrobras is rapidly catching up in the oil market. But this has not necessarily helped the Brazilian economy which has been lumbered with the reputation of a resources-dominated economy. As such when the global commodities complex sells off, so does Brazil. This can be witnessed from its more volatile annual growth figures in the table above.

But Brazil, for all its bounteous natural resources, is also a thriving and fast-growing domestic consumer economy. In fact, the Brazilian economy overtook the UK economy earlier this year in size terms. Brazil's equity markets have sold off hard in the recent market shake down but, here again, falling interest rates and falling inflation could help to reignite the consumer economy. The Brazilian central bank recently cut its benchmark interest rate to 8.5 per cent, below the levels it was cut to in the depths of the financial crisis of 2009. But for the time being Brazil will continue to be viewed as a resources play, and particularly a proxy for Chinese growth as a significant percentage of its commodities, both hard and soft, are sold into China while Chinese companies have also invested heavily in Brazil's potentially massive oil and gas industry. China accounts for around 12 per cent of Brazil's exports and a similar level of imports.

There are very few Brazil-specific investment trusts or Oeics, with most using a broader Latin American universe for their investments. And Latin American fund managers remain largely positive on Brazil. Will Landers of BlackRock Latin American Investment Trust told us: "We are positive on the prospects for Brazilian equities in 2012. The fundamentals are strong and valuations look attractive following the recent sell-off."

Mr Landers is concentrating on domestic themes but is also considering shifting exposure to exporters if the Brazilian real continues to weaken. He said: "Given the growing middle class, demographic trends, lower interest rates, lower inflation and record low unemployment levels, we feel the domestic consumption story continues to be attractive despite a weaker global economic situation, especially given Brazil's ongoing interest rate weakening cycle. We feel Brazil can continue to grow without the wider support of global economic growth because the economy is more closed, meaning it isn't as dependent on global trade."

How to gain exposure: UK-listed equities with direct exposure to Brazil are thin on the ground and investors have to be prepared to buy diversified companies with some exposure to Brazil, such as agricultural products business Syngenta, chemicals and paints giant Akzo Nobel and oil and gas business BG, which has interests in the potentially massive pre-salt fields offshore Brazil.

Russia is similar in many ways to Brazil in that it is increasingly a domestic consumer story but is widely viewed as a resources export story - so Russian equity markets tend to thrive or dive on the back of sentiment towards commodities. Admittedly, Russia's resurgence as an economic power was built on its rich resources but in recent years its domestic economy has begun to be pulled up too. Nonetheless, as Renaissance Asset Managers president and chief investment officer Plamen Monovski told us: "The public markets are quite unpleasant, they are highly cyclical and dominated by commodities so when the global markets sell off, Russia takes it on the chin."

But Russia is also the "ultimate contrarian market", according to Mr Monovski, where one needs to know the peculiarities of the country to invest successfully. He said: "For a proper risk-taker, Russia is very rewarding." But he also acknowledged the need for economic reforms to free up the small- and medium-sized companies that will service the emerging middle class. He puts a great deal of faith in the newly re-elected President Putin's plans to advance regulatory reform and reduce reliance on the oil price, mainly because Mr Putin has little choice: "If Putin doesn't act then GDP will slump and the protests that they have already had will look very mild."

The fact that the eurozone is Russia's biggest single trading partner does not bode well for Russian growth prospects right now. But Mr Monovski says: "The best time to invest in Russia is when it looks horrible and hopeless. If the market goes down further then it could be an absolute steal."

How to gain exposure: As with Brazil, UK-listed Russian stocks are thin on the ground, especially outside of the natural resources sector, but there are a number of Russian GDR issues. Stocks such as warehouse owner Raven Russia and internet service Mail.ru give some exposure to consumers and companies such as oil giant LukOil, gold miner Petropavlovsk and steel maker Evraz give exposure to resources.

Beyond the Brics

Some would argue that the Bric countries have already emerged and that true emerging markets investors should be looking further afield for real 'frontier' investment. The recent launch of a sub-Saharan Africa investment fund by emerging markets veteran Mark Mobius highlights this trend.

Some of the raciest returns can be found in the most exotic corners of the investing universe. As Slim Feriani, chief executive of Advance Emerging Capital, points out, there are more than 100 countries investors can invest in. And many are growth markets unlike the financially hobbled developed world. Mr Feriani is excited about frontier market returns even though current conditions are tough: "The opportunity is when most people are not noticing. When the dust settles returns will be 'super normal' returns, in the early stages of a bull market the returns are very good. The frontier countries are so under-researched they are the most inefficient asset class but there are 50 or so investable countries."

Mr Feriani is excited about the potential for economic growth in sub-Saharan Africa and includes North Africa and the Gulf region in the equation. He says frontier markets have rarely been as cheap as they are now, pointing out they are trading at a forward PE multiple of eight times. This, he says, is "not dissimilar to that deep panic level". He believes that if the global economy avoids a total meltdown, frontier markets will bounce back the hardest and over a three- to five-year view offer terrific value.

How to play the frontier investing game: There is a small, but growing number of frontier investment funds including the Templeton Africa fund recently launched by Mr Mobius and Mr Feriani's Advance Frontier Markets Fund.

In terms of UK equities, many frontier markets opportunities still revolve around the resources sector and London is rich in frontier companies from Caucasian mining and oil and gas opportunities to African resources opportunities. London's Aim market is also home to Vietnamese and Mongolian investment companies such as Vietnam Holdings and Origo Partners, through to Zambian agriculture and retail play Zambeef to Argentinian power companies such as Rurelec.

Investing in such far-flung companies increases risk and is not always necessarily reflected in the returns in the short term. Grabbing direct exposure to frontier companies is difficult otherwise. It's safer to entrust your funds to a manager. But, as ever, such risky investment should only make up a small part of a wider asset allocation strategy.

Slim Feriani, Advance Emerging Capital