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.