Hold steady on emerging markets until direction is clear

The big risk now for emerging markets is a change of sentiment in Europe and the United States, despite the emergence of some economic green shoots.

Templeton Emerging Markets Inv Trust

423.4p +4.4p

Questor says HOLD

Emerging markets have performed even better than Western markets in the recent bull run. The last time Questor updated on our emerging market play in mid June, shares in the investment trust were up 31pc since their recommendation on January 5. Now the shares are up 49pc. The FTSE 100 is up a mere 1.2pc over the same period.

The main reason Questor recommended buying into emerging markets is because they were likely to show stronger gains in a recovery than Western indices.

That's because they were hit harder than more developed markets in last year's market rout. Emerging markets have more risk and, in those uncertain times, investors sold their investments and repatriated cash. That's why emerging economies looked a great investment six months ago – but is the same true now?

The big risk now is for a change of sentiment in Europe and the United States. Despite the emergence of some economic green shoots, Questor is still cautious.

The real economy is going through significant pain, with unemployment rising and confidence still fragile. The bulls have been in charge for a number of weeks – the bears may be in charge sometime soon.

Last week, Paul Tudor Jones, who heads up US private investment vehicle Tudor Investments, sent a bearish note to clients with some salient points worth considering.

He argued that slowing growth in China and the return of front-page stories on swine flu could be "further catalysts for global equity markets to pause in September".

Mr Jones believes that we are in the midst of a bear market rally – which is a pretty normal thing. "Impressive counter-trend rallies are a feature, not an oddity, of secular bear markets," he wrote. "We are not inclined to aggressively chase the market from here."

Well, Questor concurs and any pullback in markets will have a larger effect on fledgling economies.

Credit Suisse also turned bearish on emerging economies last week. The broker said that six of its "tactical indicators" showed that emerging markets had hit a top.

The indicators CSFB used were: the 200-day moving average of a major emerging market index, the MSCI EMEA; the advance-decline ratio; risk appetite; cash levels; fund flows; and seasonality of developing-economy stocks.

The broker said that global investor appetite reached what it termed the "euphoria zone" on August 4, pointing to a turnaround in the rally. Credit Suisse said that index has reversed direction after hitting "euphoria" nine times since 1984.

Last week, the Baltic Dry Index, which is a measure of shipping costs for bulk commodities, fell by 17pc, its largest weekly fall since October, when the financial crisis was at its peak. The index is regarded as a leading indicator of commodity prices. This is also a bearish signal.

The long-term outlook for developing economies is very strong – in fact, it's compelling. However, there may be a better opportunity later this year to buy into this great investment, so for now, the stance on this investment trust is hold and the rating will be reviewed in the next month once the market's direction has become clearer.

ETFS WNA Global Nuclear Energy

£16.96 +25p

Questor says BUY

This nuclear exchange-traded fund (LSE: NUKP) is up 25pc since Questor first recommended a purchase on December 3. It is a broad play on the resurgence of the global nuclear industry, tracking the performance of the World Nuclear Association (WNA) Nuclear Energy Index.

The investment gives exposure to reactor constructors, plant operators, fuel groups and utilities covering the entire nuclear supply chain – all in one investment traded on the London Stock Exchange.

It is clear that nuclear power will provide a large part of electricity needs in the future. Although not cheap, it is relatively clean, despite what its detractors say. Last month, the CBI said Britain needed to reduce its emphasis on renewables and increase its investment in nuclear energy or risk a system "not fit for purpose" by 2030.

Italy's Enel and France's EDF recently set up a €16bn (£13.6bn) joint venture to build nuclear power stations in Italy. Vietnam also said last week that it planned to start building its first nuclear power plant in five years, as demand for power in the country continues to grow at a rate of about 15pc per year. About 10pc of Vietnam's power is expected to come from nuclear power plants by 2030.

Even the Middle East is going nuclear. In September, the United Arab Emirates is expected to award a $40bn (£23.9bn) contract for the design, construction and operation of a fleet of nuclear stations. Jordan also plans to provide 30pc of its power from nuclear energy by 2030.

The index tracks a basket of companies operating in the nuclear space. The largest constituent is France's Areva, at 7.72pc, followed by Hitachi (4.86pc), Tokyo Electric (3.35pc), Exlon (3.22pc) and Germany's E.On (3.1pc).

With new nuclear plants expected to be built all over the world, this fund remains a long-term buy for those seeking a balanced exposure to the sector.