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Worst Is Yet to Come for Emerging Markets, Henderson's Beesley Says

NEW YORK (The Street) -- Respite from the emerging markets rout may be short-lived, fund managers warn, as investors reassess exposure to countries with high current account deficits.

Global markets were booking gains Tuesday after a three-day equity sell off triggered by a surprise slowdown in Chinese manufacturing while the U.S. Federal Reserve kicked off its two-day meeting amid speculation the central bank will withhold any decision to further reduce stimulus.

"There is a lot worse to come in Emerging Markets this year," Henderson Global Investors, Head of Global Equities Matthew Beesley told The Street. The London-based portfolio manager noted credit provision was extended in many emerging markets, with current account deficits widening. With the wind-down of stimulus, US dollar denominated funds were being withdrawn from overseas markets - exacerbating funding shortfalls, Beesley said.

"Interest rates will rise (and) with credit overextended, this will have ramifications," he added. "We remain very wary of Emerging Markets as an asset class." Henderson Global Investors has 70.8 billion pounds in assets under management ($US117 billion).

Beesley's caution on emerging markets echoes that of Raymond James chief investment strategist Jeff Saut. Saut has warned that the risk of another debt crisis in emerging markets cannot be dismissed, but also cautions against jumping into US equities for their 'safe haven' status - believing them to be overdue for a correction.

Others downplay the potential ripple effect from any further fallout from emerging markets. Capital Economics chief global economist Julian Jessop said the slowdown in China appeared to be the first step towards a "long overdue" rebalancing of that economy. "[Recent] reforms should also allow China to sustain stronger growth over the medium term than it would otherwise have done," he told clients in a note. Secondly, Jessop noted that emerging markets were an increasingly diverse group, with vulnerabilities - such as to Fed tapering - that would rattle some, having little or no impact on others.

Emerging market economies seen as most vulnerable to lower global growth are the so-called fragile five: Brazil, India, Turkey, South Africa and Indonesia. These countries are seen as exposed to the effects of tapering as their ability to repay short-term funding to developed nations with the end of "easy money" supply is called into question. Many pundits add Hungary, Chile and Poland to the list of vulnerable nations.

Longer term, Beesley acknowledged that the structural growth story underpinning investors' love for emerging markets was within reason. While the economic growth rates of emerging nations are slowing, they still remain higher than many developed markets, while their equity valuations are far cheaper. In the short term, many strategists prefer developed equity markets such as Japan, Europe and the US.

-- By Jane Searle in New York 

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