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Stout blasts industry 'short termism' as he buys EM

by Eleanor Lawrie on May 30, 2014 at 15:00

Aberdeen Asset Management, which manages the trust, has also suffered recently from its exposure to emerging markets, reporting outflows of £8.8 billion in the six months to March.

The region has been blighted by a liquidity crunch as investors reacted to former Federal Reserve chairman Ben Bernanke’s suggestion he would reduce asset purchases, coupled with slowing GDP growth.

But one positive from this volatility is the famously bearish manager is seeing more opportunities in developing economies than before.

‘Emerging markets are more cyclical than they have ever been, so when the cyclical upturn comes then there is the potential to surprise on the upside for earnings, which is different for developed markets, which will see more of a downside in earnings,’ he said.

‘There could be positive surprises in emerging markets now valuations are not stretched, so that is a good start.’

Emerging market debt

For the first time since the financial crisis, Stout is buying into emerging market debt. ‘From a global perspective, we haven’t seen so many bonds below par with such a weak currency since 2008,’ he said.

The manager pointed to debt-to-GDP ratios of up to 100% in developed market countries. By contrast, he thinks countries such as Indonesia and Brazil will experience a ‘J-curve’ as their currencies appreciate, meaning they will be able to cut interest rates.

Stout has recently bought into Brazilian and Indonesian sovereign debt, which he said were cheap and offering a decent yield. Brazilian sovereign bonds are now the trust’s second biggest fixed income holding of 1.2%, while Indonesia is joint fifth with a 0.8% stake.

Finding a good risk-return ratio was crucial in the current financial environment, Stout argued, because developed markets have become so overpriced.

‘There are some really interesting valuations in emerging market debt at the moment. We have elections in Indonesia, Turkey and Brazil, so they are discounting a lot of political uncertainty but we are seeing genuine improvements on the domestic side,’ he said.

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