In Asia, our policy discussions focused on the secular trend toward outsourcing. Taiwan is a major b...
In Asia, our policy discussions focused on the secular trend toward outsourcing. Taiwan is a major beneficiary as reflected in the 20% increase in exports this year. In addition liquidity conditions remain positive despite rising imports and strong GDP growth. Although valuations at the company level are not inexpensive, they can be justified given strong historical EPS growth rates and a low cost of capital.
While Korea remains one of the least expensive markets in the region, there is still uncertainty surrounding the ultimate resolution of the Investment Trust Companies bond holdings. China is looking more interesting. With the macro background continuing to improve we now expect rising consumer spending to lead to an acceleration of earnings growth at the company level. Current policy in Asia is overweight Taiwan and India, neutral Korea, China, Thailand and Indonesia and underweight Malaysia and the Philippines.
In Latin America, domestic news from the major markets has been very encouraging but the financial markets have been dictated by external events.
Robust economic growth in Brazil and Mexico continues to drive earnings growth. We remain positive on the outlook for Brazil given its significant discount to other markets and an improvement in the fiscal and current account deficits. In Mexico valuations are now more attractive after the recent correction and earnings growth remains strong.
In EMEA both Russia and Turkey were weak during May. In Russia the domestic news has been very encouraging. The pace and tone of legislative change has been impressive and supports our positive view on the new government. The economic fundamentals also continue to surprise positively. We remain positive about the outlook despite the short-term volatility.
Recently we have focused on the developments in Turkey. Great strides have been made in reducing the inflation rate but the success of the stabilisation programme is not assured. Due to the high propensity to purchase imported goods, the government must sell additional assets in order to finance the country's growing current account and trade deficits. This should not be a problem over the short term but we are becoming more concerned about the viability of this strategy over the medium term. As a result we have become more cautious about the market. Current policy continues to be overweight Russia, Israel and Hungary, and underweight Turkey, Greece, Czech Republic and South Africa.
Over the medium term we still remain positive on the relative performance of emerging markets as the current valuation discount to developed markets of more than 40% is very attractive in a period of firm commodity prices and global growth.
Matt Linsey is deputy head of the global emerging markets team at Baring Asset Management
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