Buy into emerging markets

Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Mike Turner, fund manager, Aberdeen Multi-Asset Fund.

Equities look reasonably attractive, particularly relative to government bonds. This, along with the recent Federal Reserve and European Central Bank easing of monetary policy, should support stocks in general. But we realise that the weak economic backdrop might mean that any upward momentum in equity markets may not be sustained into 2013.

Recent market weakness has largely been driven by concerns over the so-called fiscal cliff (tax increases and spending cuts set to kick in at the end of 2012 in America). Most believe that a last-minute deal will be reached.

We agree, but are also aware of the longer-term implications of such a deal. Any hurried agreement may lack detail and possibly impact on the US credit rating. We feel a continued period of below-par growth in the US remains more likely than a return to recession. Where does this leave investors?

Within the troubled pool of British financial stocks, Prudential (LSE: PRU) stands out as being well run, with attractive growth prospects and diverse global exposure. In recent years it has rebalanced its exposure from mature but profitable British operations to growth opportunities in America and Asia.

So the firm will benefit as baby-boomers retire and insurance penetration in Asia grows. The cash from these operations has funded further expansion and we believe that it will continue to support good returns in future years.

In the fixed-income arena, the diversity of the market has never been clearer certain segments are performing quite differently to others. For example, emerging-market bonds are still generally treated as more risky when investor fear takes hold. Meanwhile, core, developed-market bonds should perform well in times of such stress. Geographic and credit quality differences present opportunities.

At the country level, we favour Asian and emerging markets. Their healthy public finances, favourable demographics and dynamic economies are all positives. Having reformed their economies after their own crises in the late 1990s, they entered the 2007/2008 financial crisis in better health, and so weathered the storm better than they might have done.

On emerging-market local currency bonds, we particularly favour Mexico as we believe the economy is in robust shape, and we can see the Mexican peso appreciating over the medium to long term as Chinese labour costs rise. This should trigger foreign direct investment flows into Mexican manufacturing.

The fear of inflation is likely to favour real' assets. We like infrastructure investments in particular. The strong and steady cash flows generated should continue to attract investors, while opportunities will expand as developed markets are forced to tackle their decaying infrastructure, and emerging markets consolidate their status as the growth engines of the world.

Simplicity is another part of their appeal as complex financial products have fallen out of favour. The funds we like as a way into this story are HICL (LSE: HICL) (formerly HSBC Infrastructure), 3i (LSE: III) and John Laing Infrastructure (LSE: JLIF).

In short, while reasonable valuations and generous liquidity provisions from central banks make us cautiously optimistic, many key questions hanging over markets remain unanswered. This uncertainty could lead to further volatility and reinforces our cautious stance.