The outlook for emerging markets remains bright. Many developing countries will enjoy economic growt...
The outlook for emerging markets remains bright. Many developing countries will enjoy economic growth well in excess of their mature country counterparts this year, with China leading the way.
According to the IMF's April 2003 World Economic Outlook, developing economies are forecast to grow at 5% in 2003 and 5.8% in 2004, compared with forecast economic growth of 1.9% and 2.9% over the same periods for developed nations.
Many regional economies have experienced a deep recession, and in some cases a severe financial crisis over the last few years.
Consequently, other than in the technology area, managements have adopted a generally cautious approach to expansion. Balance sheets are now in much better shape than in the mid 1990s, while many companies are finally delivering tangible evidence of a commitment to good corporate governance and shareholder value creation. Many banks have spent the last five years repairing their balance sheets. The worst is now over, and loan growth has returned to many areas in the region for the first time since the Asian crisis.
We are encouraged by the number of well-managed companies within the emerging markets universe which enjoy quality franchises, healthy finances and excellent long-term growth prospects. Many of these companies continue to trade at extremely attractive valuations.
Of course the usual caveats apply. The structural imbalances (the fiscal and current account deficits and high consumer indebtedness) in the US economy could yet provide a significant shock to many emerging market countries. North Korea, Israel/Palestine and relations on the Indian subcontinent remain problematic, although we are encouraged by the tentative progress towards peace in Sri Lanka over the last year.
Most Asian technology companies remain victims of the ease with which the sector raised capital between 1998 and 2000. In Eastern Europe we are concerned by the size and deteriorating fiscal and current account deficits of the large countries soon to become part of the EU.
In Latin America we are pleasantly surprised by the progress made in Brazil. President Lula has so far managed to achieve the seemingly impossible by becoming a champion of the anti-globalisation movement with his own brand of social justice, while at the same time befriending the investment community with his competent handling of Brazil's daunting economic challenges.
Following a recent visit to India we are particularly positive about the quality of a number of companies listed on India's stockmarket. Two Indian companies we favour are Infosys Technologies and HDFC Bank. Infosys provides IT consulting and software services to companies in developed markets.
Lower employment costs in India allow it to compete effectively against Western rivals. Although Infosys has been affected by the downturn in technology spending, this is an extremely well-managed company that has done well building up its franchise.
Stronger balance sheets.
Improving corporate governance.
Attractive valuations available.
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