The year has been marked by extreme volatility, as the Nasdaq bear market which began in March conti...
The year has been marked by extreme volatility, as the Nasdaq bear market which began in March continued to reverberate throughout the emerging markets during April and May. Most major markets recovered during June, but still year-to-date the asset class has significantly underperformed.
Despite positive news in most markets, fears of higher US interest rates contributed to corrections in Latin equities. The Argentine government managed to pass a conservative budget and labour reform that will reduce spending and improve the fiscal account. The economy, however, is not rebounding as expected and the implemented spending cuts are now exacerbating the recovery.
Positive surprises continued in Brazil over the last six months. The government passed two important laws that will reduce government spending. Additionally, foreign direct investment has been strong and the current account deficit has been smaller than expected. Moreover, the Brazilian Central Bank reduced interest rates in June and August and changed its directional bias to downward. More consolidation in the telecoms sector and in cellulars is expected and higher equity valuations should result.
The Asian region has fared worst in the last few months with large, tech-heavy markets such as India and Taiwan recording double-digit declines. This follows a strong showing in 1999 when Asian markets were up 63%. There have been several key drivers of this year's decline. After 1999's sharp rally, much of Asian TMT declined in sympathy with the tech corrections worldwide. Compression of valuations in this sector combined with weaker semi-conductor prices have hurt Taiwan and Korea.
We maintain a positive outlook on China driven by increasing de-regulation and a propensity for technology adaptation. Additionally, equity prices in Thailand, Indonesia and the Philippines have been depressed by political turmoil, which have created valuations that are attractive and may offer a substantial upside. Re-rating of software service companies and a pruning of the fiscal deficit should help investor appetite for Indian stocks while Malaysia should receive a boost from Index re-weighting and demand for low cost electronics.
Dramatically divergent performance was recorded in European, Middle Eastern and African emerging markets. Higher oil prices helped stock markets in Russia and South Africa. The Greek and Turkish markets continue to suffer from concerns over valuations and recent and potential new issues of paper. The Hungarian market has also been disappointing.
The conventional wisdom is that an investor has to select countries and not stocks in emerging markets. We are seeing stronger correlations between developed and emerging markets at the sector level. We learn from the experience of our developed markets analysts in technology, telecommunications, banking, etc to help us add value in analysing emerging markets companies.
Alexander E. Zagoreos is managing director of Lazard Asset Management
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