Eye on emerging markets

Retail investors in Hong Kong, the mainland and elsewhere in the region are nervous, mainly because they fear the worst for the year ahead.

A number of financial pundits and strategists have warned that next year will be a difficult one for equity investors with the prospects for capital appreciation in most developed equity markets expected to be low.

Fidelity Worldwide Investment's chief investment officer for equities says in a note to clients that the need to focus on the income-generating aspects of equities has never been greater.

Dominic Rossi says that while emerging markets will not be immune from euro zone-inspired volatility, their attractions will become more conspicuous as the developed world's problems are laid bare during the final, volatile phase of the sovereign debt crisis in the weeks and months ahead.

Economic weakness and financial contagion in Europe will inevitably affect global growth. However, Fidelity does not see a slowdown in emerging markets as a big concern because these face inflationary pressures to which slower growth is a partial solution. This allows monetary policy in emerging markets to become more accommodating. Meanwhile, financial advisers based in Asia think that despite fears of a bubble in gold, the precious metal will come second only to Asian/emerging market equities in delivering returns over the next 12 months, according to a survey by Royal Skandia, part of Old Mutual Wealth Management.

In Hong Kong, Asian/emerging market equities received a combined 37 per cent vote for best-performing asset class, followed by gold at 27 per cent.

In contrast to the rest of the region, advisers in Singapore were also bullish on agriculture, which beat gold for second place, with 20 per cent choosing it as their favoured asset class.

The views are clearly driven by fears of instability in the financial markets and loose monetary policy.

Topping the list of investor fears were global contagion, cited by more than 60 per cent of advisers in all regions, followed by inflation, which is of particular concern for advisers based in Hong Kong and Singapore.

While the prospect of capital appreciation is very low in developed equity markets in the next 12 months, Rossi believes opportunities exist in income and emerging markets.

'Within equities, investors should focus on high-quality, defensive companies with stable and reliable earning streams, which pay high and sustainable dividends.

'The dividend income offers a measure of protection to investors against further market volatility,' he says.