Mutual funds invested in emerging markets post big gains

Time will tell whether bounce is beginning of a trend or a short-lived surge

Apr 7, 2009 @ 2:55 pm

By Sue Asci

The average emerging-markets-equity fund gained more than 10% in March — outpacing the returns posted by funds that invest in developed countries, according to Lipper Inc.

But whether the turnaround is sustainable remains to be seen.

According to Lipper, Pacific ex-Japan funds posted an average gain of 14.06% last month. China funds, meanwhile, climbed an average of 13.75%, compared with 13.13% for the average emerging-markets fund.

In addition, the average Latin American fund climbed 9.81% for the month. As a result, both Latin American funds and China funds posted positive returns for the total quarter, Lipper found.

“The longer-term view looks very attractive to me, especially in emerging markets,” said Daniel Grana, head of emerging-markets equities at Putnam Investments of Boston.

Emerging markets in general were better-positioned to face the global recession. he said.

“[Their] banking systems in general are healthier,” Mr. Grana said.

In addition to avoiding the pitfalls of the subprime crisis and keeping a tight leash on regulation that affects their banking systems, many emerging countries have made effective policy moves.

“They are cutting interest rates and spending more government money to mitigate the pain of the loss of the export markets like the U.S.,” Mr. Grana said. “Domestic growth is going to drive emerging markets. I’m not saying they won’t be affected by what’s happening with developed markets, but they won’t fall off the cliff.”

However, some think the rally may be temporary.

“I personally don’t think it’s the beginning of a new bull market in [emerging-markets] equities,” said Tom Leventhorpe, a specialist in such equities at J.P. Morgan Funds, an affiliate of JPMorgan Chase & Co. of New York.

“We are still seeing deleveraging taking place in multiple developed countries. This was a relief rally. It is highly likely that we will retest the lows.”

Others say that only time will tell.

“We’ll know in time whether it’s a dead-cat bounce or whether we saw a legitimate bottom in the markets,” said Jeff Tjornehoj, senior research analyst at New York-based Lipper.

Investors should expect more volatility from emerging markets, he said.

Other events also could cause a setback for emerging-markets funds.

“We haven’t seen the right policy mix out of the U.S. and Europe, which is a necessary condition for emerging markets to continue to shine,” Mr. Grana said.

And the future of globalization is key, according to Mr. Leventhorpe.

“Trade has been a great enabler of emerging markets,” he said.

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