Both debt and equity in emerging and frontier markets should be targets in 2011 for investors looking for undervalued growth and high quality companies, according to Investec Asset Management.

With emerging equities rallying 35 per cent from their May 2010 low, “the bears are now warning of a bubble, but Investec believes valuations are still below those of developed markets”, said Investec AM’s head of sales and marketing, Justin Cowper.

According to Cowper, if last year’s returns were analysed by looking at the 26 individual emerging markets, a large discrepancy between nations could be seen.

He was drawing on the opinions and forecasts of Philip Saunders and Max King, his London-based colleagues in Investec’s global multi-asset team.

The previously hyped BRIC nations all struggled in 2010, said Cowper. India came in only 13th out of 26, Russia was 17th, Brazil 21st and China 22nd.  Stand-out performers were Thailand and Peru rising 50.8 per cent and 49.2 per cent respectively in 2010.

“We see this as a clear sign that specialised active management is going to be critical in securing consistent returns from emerging markets as opposed to relying on exposure to emerging markets through Australian equities,” he said.

Commenting on debt, Cowper said that if developed markets bonds continued to struggle in 2011, the spreads on emerging-markets debt over developed-market bonds would become more and more compelling from a risk-adjusted perspective, making this a great buying opportunity.

Last year, a number of UK-based funds took advantage of this opportunity, he said. They moved to a discrete allocation in emerging-market debt, and away from the traditional method of using a core plus strategy.

Following the trends in the UK, Cowper expected more Australian funds to follow suit, taking the asset allocation decision “into their own hands by moving a larger portion of their portfolio into specific sub-sectors of fixed interest, such as emerging market debt”.


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