F&C Investments is maintaining a selective approach within its global emerging markets products following the recent sell-off. At the country level, the F&C emerging equities team favours Russia, the United Arab Emirates and Brazil and is most underweight China, Korea and Malaysia.

Despite the relative lack of exposure of many emerging countries to the worst aspects of the global credit crunch, the external environment still carries challenges from a slowdown in global growth and rising inflation, says F&C.

ôRisk aversion indicators are not back to their January levels, so there is no immediate feeling we should be increasing risk in the portfolios,ö says Jeff Chowdhry, London-based head of emerging equities at F&C. ôInstead we continue to focus the portfolios on those countries where the fundamentals remain strong and valuations are more attractive.ö

Russia is one market where valuations are attractive, according to F&C.

Despite some concerns about higher-than-expected inflation, F&C is bucking consensus and is more optimistic about the impact that the new Russian president, Dimitri Medveydev, will have on the corporate sector.

ôAlthough Medveydev is undoubtedly closely aligned to former president (Vladimir) Putin we believe this is positive for economic stability. We think that a reduction in taxes and less state interference are likely,ö says Chowdhry.

For example, Chowdhry notes, recent changes in the mineral extraction tax regime for oil companies seek to increase the tax-free threshold from next year from $9 per barrel to $15. The finance ministry is also talking about granting a seven-year tax holiday for the development of remote oil fields in specific regions. It is believed that further tax incentives are also being considered. The government also wants to scale down involvement in the economy. Russia continues to benefit from booming oil prices and earnings growth from Russian corporates is strong.

Combined with attractive valuations and the potential for further exchange rate appreciation, F&C is heavily overweight in Russia.

F&C also favours the UAU which it says, like Russia, is experiencing a windfall from high oil and gas prices and has created a huge current account surplus. The government of UAE is using the financial flexibility from such revenues to develop its presence as a key hub for financial services and tourism, F&C notes. The main risk, says Chowdhry, is that ôa prolonged period of negative real interest rates will create an asset bubbleö.

F&C has become more cautious on a number of Latin American markets with a current underweight on Argentina, Chile and Mexico but remains positive on Brazil, the largest country in the region, whose economy continues to perform well and is expected to grow by 5% this year. Chowdhry argues that recent upgrades by credit rating agencies should help attract additional capital flows to Brazil.

Other overweight emerging markets are India, Taiwan, Thailand, Israel, Peru and Colombia.

Although the F&C team is underweight China, believing there is a risk of earnings disappointments in 2008 given rising input costs and increased price controls, it still believes the economy can deliver double-digit growth over the next 12-months and that the Chinese authorities have both the will and flexibility of options to deal with rising inflation.

ôWe believe emerging equities should be considered an important allocation within a diversified portfolio whether you are a long-term private investor or a pension scheme,ö Chowdhry says.

F&C Investments is part of London-listed F&C Asset Management, which traces its origins back to 1868 with the launch of the Foreign & Colonial Investment Trust, the first ever publicly listed investment fund. F&C, which recently opened its first Asian office in Hong Kong, manages around Ç128 billion worldwide.