Thursday 17 February 2011

Time to sell Latin America fund?

Question
I have some money invested in Invesco Perpetual's Latin America fund which has performed very well but has recently lost significant value.

I originally attributed this to the problems in Egypt which seemed to affect emerging markets generally, and have sat tight in the belief that the fund would recover, but I have just read an article saying that emerging markets are now out of favour - although they were being tipped as a growth area at the start of the year - and that fund managers are now moving massive amounts of money out of emerging markets, and will continue doing so which will precipitate further falls.

I was wondering if this is true and if sentiment has now moved against emerging markets?

Some pundits are still waxing lyrical about the sector and Latin America in particular.Answer
I wouldn't take newspaper articles predicting which markets will be hot or not too seriously, as the views often seem to change far more frequently than the fundamental prospects for the underlying markets themselves. Such articles might make entertaining reading, but I'm not convinced they'll always help us all become better investors.

And, even if they are right, when it comes to emerging markets I'd really suggest investing for the long haul (i.e. at least 5-10 years, ideally longer) and not losing too much sleep over shorter term volatility.

In my view, investing in emerging markets is all about believing in the big picture and not getting too distracted by the multitude of unpredictable factors that will affect these markets along the way.

Of course, in an ideal world I'd love to be able to spot trouble on the horizon, cash in my chips, then re-invest once markets have fallen. But even professionals who spend their lives studying markets often struggle to do this, so you need to be realistic about your chances of success when trying to time markets - especially emerging.

Invesco Perpetual Latin America has fallen about 7% over the last month, although it's still up around 10% over the last six months. While this kind of volatility isn't good for nerves, it's not unusual for emerging markets.

The likely cause of the recent setback, as yiou suggest, is investors selling off investments in the region due to fears over the Middle East and rising emerging market inflation. High inflation is seen as negative because it might prompt central banks to raise interest rates making it more expensive for companies to borrow - which could reduce profits and/or reduce investment in the future. But trouble in the Middle East could hurt oil supply and push its price, which is arguably good news for Latin American oil producers, so I'm less sure why this is causing investor panic (other than the obvious global risk of reduced Middle Eastern political stability).

Will either de-rail the long term Latin American growth story? I doubt it. The world will still likely demand more energy and materials over years to come, which is music to Latin America's ears (because it produces a lot of both). And the resulting growth in local prosperity creates a bigger market for domestic financial services and consumer goods.

It's this story that fund managers like Invesco Perpetual are trying to tap into - over half your Latin America fund is exposed to the materials, energy and financial sectors.

Will there be further falls short term? Probably, but difficult to predict when and by how much. If you are nervous then don't be afraid to sell. But bear in mind that spotting a good time to re-enter the market could be difficult, which runs the risk of missing the boat if these markets bounce back quickly.

Read this Q and A at http://www.candidmoney.com/questions/question385.aspx

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