Over the past year we have seen a significant improvement in the outlook for many emerging markets, ...
Over the past year we have seen a significant improvement in the outlook for many emerging markets, largely in response to the broad-based pick-up in global economic activity. This, in turn, has led commodity prices to recover from last year's depressed levels, particularly those of base metals and oil. As producers of these commodities, emerging markets stand to make considerable gains
Asian equities benefited most this year as investors moved back aggressively once the shoots of economic recovery began to emerge. However, we are still positive on the outlook for the region. Investment is concentrated in the two largest markets of Korea and Taiwan, which we believe have the greatest capacity for sustainable growth. Korea has moved further and faster in terms of corporate restructuring and reform of its financial systems than many had expected. Taiwan has a large and competitive technology sector which leads the world in several important areas and already boasts a considerable degree of financial transparency and management quality
However, stock selection here is likely to become increasingly important given these markets' recent strength. For example, the forced bankruptcy of Daewoo in Korea and the collapse of HSBC's purchase of Seoul Bank are likely to prompt a closer examination of problem loans within the country's banking system, thus putting pressure on the sector
In the electronics sector, however, several of Korea's leading companies posted excellent results, forcing analysts to raise their forecasts substantially. Naturally, our investments are focused on this area
Latin American markets tended to fall from favour during this period as investors focused on the dramatic rebound in Asia, and we now believe the region could well surprise on the positive side. Mexico and Chile have performed reasonably well and could both experience growth in excess of 4% next year. Mexico has been buoyed by the strength of the US economy, while Chile benefits from the effect of rising base metal prices
The same rate of growth could also be shared by Brazil where dire forecasts of surging inflation and a deep recession proved incorrect. We still have confidence in the region, focusing on Brazil and Mexico where improving economies and depressed valuations should yield better performance
In Europe, the convergence theme has fairly run its course in Greece. Hungary and Poland, however, still have a long way to go. These countries will benefit from the resumption of economic activity across the EU and also from a greater degree of economic stability in Russia. Investment in Turkey has been increased following the recent sharp fall in stock prices. The cost of the recent earthquake has been assessed at a manageable 2% of GNP, and we believe financial aid coupled with the new administration's reforms should lead to a sharp fall in interest rates and a rebound in the economy
Although some analysts are concerned that US interest rates have begun to rise, we believe this should be seen as an acknowledgement that last year's rate reductions were successful in rebuilding confidence and creating a climate in which emerging market economies could begin not only to stabilise but to recover
We do not believe the Y2K effect will be any worse for emerging markets than for developed economies. While we therefore expect the performance of emerging market equities to remain very varied, we believe the prospects for emerging markets over the next few years are both exciting and positive
Philip Ehrmann is head of emerging markets at Gartmore Investment Management
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