Matthew Hunt: Emerging markets are overvalued

In a low-growth environment many investors have been extolling the virtues of emerging markets, but Matthew Hunt, former Citywire cover star and investment manager and branch principal at Prospect Wealth Management, believes the asset class is overvalued.

He is currently taking a more defensive approach, favouring alternative investments and index-linked bonds, which he says offer better value than the overbought markets of India, China and Brazil.

As well as harbouring risks, Hunt believes the emerging markets – in particular China – appear too expensive and told Citywire that the firm has instead opted to make more defensive plays.

‘At economically uncertain times such as these, emerging markets are often pushed as attractive areas because they are growing. But on a cash flow-to-yield basis, we see the emerging markets as expensive,’ Hunt said.

‘We also think there are real risks. Not only do these markets tend to be more volatile, but when the developed markets turn down, these emerging markets tend to turn down as well, though to a much greater degree.’

Since launch in June 2006, Prospect Wealth Management has generated a return of 16.5% on its 50% bond, 40% equity portfolios, while the rest of the market returned 6.7%.

Hunt has positioned clients’ portfolios cautiously for the coming months, albeit steering clear of gilts, which he believes are also overvalued, preferring short-dated corporate bonds from the financial sector instead.

Concerns about deflation in the near to medium term, as well as fears the UK could slip back into recession, could create an opportunity to buy into index-linked bonds, Hunt (pictured) added.

‘If there is a deflationary panic, there could be an opportunity to buy protection,’ he said. ‘There are still opportunities in corporate bonds and the financial sector and groups such as Lloyds and the Royal Bank of Scotland come with an implicit government guarantee.’

However, London-based Prospect remains underweight in bonds overall, with a strong preference for the short end of the yield curve.