Focus Capital avoiding emerging debt, likes Asia stocks

Friday, 16 December 2011 01:11 - - {{hitsCtrl.values.hits}}

LONDON (Reuters): Emerging market debt looks overvalued as a result of the euro zone sovereign debt crisis and one emerging market multi-asset manager says he currently has no exposure to such bonds.

“Bonds have more downside than upside, managers have been driven into high-yielding assets beyond their remit and that does not create fantastic valuations,” said John Cleary, managing partner of emerging market fund of fund manager Focus Capital.

Investors have bought emerging sovereign debt as a respite from risky euro zone debt and low U.S. yields, so emerging debt spreads have not widened much over U.S. Treasuries, and still have further to go.

“You would expect spreads to be 1,000 basis points over U.S. Treasuries,” Cleary said. They are currently less than 400 bps .

Focus Capital invests in between 8 and 14 emerging market funds from a long-list of around 30. Cleary currently favours investing in emerging equities and also has a large holding in cash.

“This year has been the most challenging in my whole career, because of the concentration of unpredictable events,” Cleary, who has been a fund manager for 24 years, told Reuters in a briefing.

“I will be happy if we match the benchmark this year.”

Focus Capital has an annualised return close to 15 percent since launch in Feb 2007, but this year its benchmark, the MSCI emerging equities index, has fallen 22 percent.

However, Cleary said with valuations down at 2008 levels, next year should be a better one for emerging market equities.

The bulk of Focus’ equity holdings are in Asia.

“Asia has moved from an export-driven model to trying to generate domestic demand. In uncertain times, people like to shop at home -- there is great earnings growth,” he said.

“We are invested in a couple of funds that are focused on consumption in Asia.”

China was likely to experience a soft landing, equating to annual GDP growth of between 6.5 and 8 percent, rather than a hard landing, Cleary said.

Cleary said he did not believe in BRICs -- Brazil, Russia, India and China -- as a coherent investment story, but the marketing of the concept had brought investors into emerging market assets as a whole.

“India is the world’s biggest democracy but getting reforms planned and implemented is a bigger challenge. We are not averse to Russia, corporate governance is a big issue but that’s factored into prices.”

However, one of the funds in which Cleary is currently invested focuses on the Next-11 markets of Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, South Korea, Turkey and Vietnam.

“It’s a more diversified group, it’s not just about population size.”