Advisers remain optimistic on emerging markets

Independent financial advisers (IFAs) are becoming increasingly bullish on emerging equity markets.

Thirty-two per cent of IFAs are more optimistic about the 2010 outlook in emerging markets, while 30 per cent see more potential in UK shares, according to results from the Virgin Money Investor Intentions Index.

The index, which tracks the confidence of IFAs across 10 different sectors, found that the results compared significantly from a year ago, when only 17 per cent of advisers were bullish on emerging markets, while 50 per cent stayed with UK equities.

The shift towards emerging markets has become more pronounced over the past few months as both retail and institutional investors across the UK search for alternative sources of income. Investors riding on the back of the market recovery have also turned to commodities and emerging markets as a hedge against possible inflation.

IFAs and fund managers are also overweight in this sector as they move away from corporate bonds and cash.

Although the FTSE 100 has rebounded quickly from as low as 3512 in March, figures from the study reveal that financial advisers are showing a greater preference towards foreign equities going into next year.

Optimism about equity markets in the Far East has also risen to 22 per cent, up from 12 per cent only a year ago, even in spite of the current debt crisis that has shattered Dubai World.

Financial advisers have not completely shied away from UK equities, however, as 83 per cent still recommend this sector to clients.

Grant Bather of Virgin Money said: ”Optimism about emerging markets reflects the growing belief that economic recovery is underway worldwide while the UK has yet to officially emerge from recession.”

The MSCI emerging markets index has doubled since March of this year though it has suffered in the wake of the Dubai debt crisis. The iShares MSCI emerging markets ETF, for instance, has given investors a 50 per cent return over a one-year period.

Mr Bather said investors are also taking on a bit more risk in return for long-term gain.

However, there are fears that emerging markets will also experience inflation.

Keith Wade, chief economist at Schroders Investment Management said: ”There is rapid growth in Chinese money as banks are being told to lend aggressively, though we could see inflation at 6 to 7 per cent. At this moment we are overweight in emerging markets, but the question is when to get out.”

Despite these fears, many advisers and fund managers still view emerging equity markets as an area in which there is greater potential to outperform the indices.