Emerging markets fund managers are on their guard as evidence of growing correlation with developed markets and the inflation threaten to ruin the outlook in certain areas, according to S&P's annual review based on reports on 40 emerging market funds. The agency noted that after seven years of emerging markets outperforming developed markets, their performance in the first three months of 2008 showed a reversal of the trend as the S&P IFCI Composite Index fell 11.3 % compared to the S&P Global 1200 Index which fell 8.9%.

S&P Fund Services lead analyst, Roberto Demartini, said many emerging market fund managers still believe the macro picture is extremely solid. “The Q1 results point up the possibility that the much discussed 'decoupling' either might not materialize or might not result in emerging markets outperforming developed markets,” said Demartini. “In some cases, this has prompted managers to increase exposure to the low-correlation bets in their portfolios, either via gold as at First State or via frontier and - in theory - less correlated markets,” he added. He referred to two managers who both see food inflation as becoming a significant source of concern, threatening to 'ruin the party' in places like India, as it won’t be able to continue subsidizing petrol prices. Others, Demartini said, continue to find attractive opportunities in India in financials and telecoms.  

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