The recent launch of Terry Smith's Fundsmith Emerging Markets (FEET) vehicle looks particularly well-timed. Broadly speaking, emerging market (EM) equities have lost over a third of their value relative to developed market indices since their high-water mark at the end of 2010, but evidence suggests that market sentiment is turning - perhaps decisively.
The latest quarterly 'Investment Barometer' from Baring Asset Management indicated that 55 per cent of the industry professionals it surveyed believe their clients should increase their exposure to EM equities. That's up 14 percentage points from the previous quarterly reading, with a quarter of the respondents describing their outlook as "very favourable".
The Barings findings are echoed in a note published by JPMorgan Cazenove's European equity research team, which highlights the prospect of improved EM equity valuations on a stronger global growth outlook. Analysts from the investment house estimate that EM equities now trade at a 28 per cent discount to developed markets. If, indeed, we have passed an inflection point for markets, the discount on offer represents a very attractive point for investors, but it could narrow rapidly if recent inflows into EM-backed derivatives are anything to go by.
The EM buyers' rally, short-lived though it may be, is at least partially linked to the contraction in US first-quarter GDP. The surprise reversal has increased the likelihood that the US Federal Reserve will keep interest rates at an ultra-low level well into next year. The vulnerability of EM exchange rates and bond prices was aptly demonstrated last year by the sell-off prompted by expectations of a tightening in US monetary policy. Admittedly, some EM economies are reducing their exposure to US interest rate rises by issuing a greater share of public debt in domestic currencies, but it clearly remains an issue for investors.
Monetary policy aside, institutional investors would certainly have taken note of the latest HSBC/Markit purchasing market index (PMI) for China, which showed the country's factory sector expanding for the first time in six months. Meanwhile, improved order flows, particularly from overseas, resulted in HSBCs PMI data for India expanding at its fastest rate since February.
