Investors can get around emerging markets fears: Goldman Sachs

Emerging markets will continue to attract investors despite serious threats such as inflation and investors turning to developed markets, as the search for yields will draw them back, a director at Goldman Sachs Asset Management said.

Frankfurt: Emerging markets will continue to attract investors despite serious threats such as inflation and investors turning to developed markets, as the search for yields will draw them back, a director at Goldman Sachs Asset Management said.

Even as some investors are turning their backs on the countries, which they believe may have run their course for the time being, Katryn Koch, executive director at GSAM believes emerging markets will continue to attract investors, looking for good returns.

"If you look at the investors based around the world, (they) very underweight EM (emerging markets) equities ... Needing growth in their returns will continue to bring people to EM equities," Koch said in an interview.

Investors fear inflation in emerging markets posts a serious threat for future growth, but Koch believes the countries have enough ways to combat it through increasing rates and allowing currencies to appreciate.

"We feel that central banks which have already moved to tighten those inflation pressures will continue to do that and execute good transparent monetary policy and deal with inflationary pressure appropriately," she said.

Koch said in her portfolio she would be spending a lot of time with the management of the companies GSAM is investing in, ensuring they can pass on costs of inflation to the consumer.

Strength of the European markets as well as a quick recovery of the US economy could drag investors away from the emerging markets.

"It is our view that this could be a great year for US equity markets, but I don't think flows are going into the US and abandoning EM."

GSAM last week launched its N-11 equity portfolio, giving investors the opportunity to find alternatives for its BRIC portfolio (Brazil, Russia, India and China).

The N-11 features Bangladesh, Egypt, Indonesia , Iran, South-Korea, Mexico, Nigeria, Pakistan, the Philippines, Turkey and Vietnam.

"We took a look at other very populated developing economies with great demographics, that would mean they have the scale to have a BRIC-like impact on the world," Koch said.

GSAM's assets under management in the BRIC countries was USD 1.5 billion at the end of 2010, with 36.8 percent of the portfolio invested in China, 33.3 percent in Brasil, 16.2 percent and 13 percent in Russia.

Koch argues investors around the world are underweighting equities, relative to history.

"As yields will become very compressed and very scarce to find, people will need to find a source of return in their portfolio and that is going to draw them back to equities as an asset class."

On top of that Koch says emerging markets stocks still trade in-line with long-term history. "That to me says there is not a bubble. And when you look at investors' holdings around the world, so many investors underweight this asset class it's hard for me to argue that that is a bubble scenario."

Koch prefers going straight into emerging markets rather than betting on European and US firms, which are active there.

As these economies mature more, there are going the be local players that eventually could compete with the current multinationals, she said.

Bureau Report

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