All eyes on emerging markets in 2013
Funds will keep a close watch on developing economies, whether they're undervalued or in the last chapters of a high-growth story
Some international fund managers are still cautious about the euro-zone crisis and are betting on the low valuations of emerging markets next year.
But others say the high-growth story of these regions might just be a thing of the past.
Cathay Conning Asset Management chief executive Mark Konyn said the cyclical downturn in emerging economies this year had dampened enthusiasm, and fund flows to stock markets had not been strong because investors had become risk-averse.
Beijing forecasts the country's full-year economic growth will be about 7.5 per cent, down from the 8 per cent average of the last five years. The Shanghai stock market has been one of the worst performers this year.
Many market watchers believe the euro-zone crisis and the continuing economic downturn in the US will have knock-on effects on emerging markets such as China.
"More attention will be paid to overall macroeconomic management in a slower growth environment," Konyn said, adding that emerging-market bonds performed well this year as investors switched attention from stocks to bonds in these markets.
"Falling interest rates and narrowing spreads have pushed emerging-market bond prices higher.
"The asset class is among the top performers this year."
Looking to 2013, he said there was still room for rates to fall and the asset class would remain in favour.
"The risk is that investors will ignore the quality aspect and overpay for credits in a market flush with issuance," he said.
BEA Union Investment chief marketing officer Alex Lee said that over the past two years, emerging-market stocks, mostly in the BRIC countries (Brazil, Russia, India and China) underperformed those in the US and other Western markets due to a rapid deceleration of economic growth and a credit crunch.
"However, over the past few months, emerging markets have outperformed global markets and investor sentiment has improved significantly," Lee said.
"In China, which has always been the growth engine in emerging markets, the economic growth rate has clearly stabilised, as shown in the latest Purchasing Managers' Index."
But Lee said there were signs - such as the lacklustre prices of steel, iron ore and coal - indicating that the latest rebound was not broad-based.
"Also, Latin American stocks have underperformed emerging Asia over the past few years. This regional divergence could be attributed to the continued weaknesses in commodity prices, which have negatively impacted [Latin American commodity users] and benefited emerging [Asian commodity users]," Lee said.
Christopher Cheung Wah-fung, legislator for financial services, said the monetary easing policies announced by the United States, Europe and Japan in September as well as an expanded programme unveiled this month triggered hot money flows into emerging markets, including Hong Kong.
"This hot money from the West is going to be invested in Asia, including Hong Kong, as our markets remain cheap compared with the West," Cheung said.
"That will benefit the Hong Kong stock market in the short term but as it is mainly speculative money, it is likely to cause volatility when it leaves."
But Schroders client portfolio managing Alan Ayres is still a firm believer in the long-term growth story of emerging markets.
"Emerging economies are expected to continue to grow much faster than developed economies," Ayres said.
He cited the International Monetary Fund's prediction that developed markets would only grow by 2.2 per cent from 2012 to 2016, compared with 6 per cent for emerging markets.
He said emerging countries generally had relatively low export exposure to Europe. In the first eight months this year, for example, only 14 per cent of China's outward shipments headed for Europe and 17 per cent to the US.
Added together, consumers in China and other emerging markets were the biggest group of consumers, bigger even than the US.
Invesco chief investment officer, Asia ex-Japan, Paul Chan Pak-kiu, is also upbeat about emerging markets.
"Global growth will come from emerging markets over the next decades. Investors should invest in areas that will grow at a higher rate than the global average," Chan said.
"The emerging markets' share of global GDP will rise. The same goes for profitability. Companies will earn more profits from emerging economies and the weighting of emerging markets in the global portfolio will rise in line with profit."
For Brett McGonegal, executive managing director and chief executive of Reorient Financial Markets, the market to watch is China.
"I think the value and growth prospects for each of these countries is changing rapidly and the correlation is diverging as well. China was the global laggard and has been a tough trade for all investors in 2012," McGonegal said.
"Investors and money managers are either short or underweight on China and we are seeing the first phase of catch-up," he said, adding new leaders "will be active and move quickly to spur growth and faith in China".
"This will help sentiment and lure money back into the market.
"Brazil will still be a focal point as the Olympics will keep Brazil in the news. The game will be about valuations in 2013 and China offers the best opportunity."