Emerging markets have borne the brunt of the slowdown in world economic growth as all but the most d...
Emerging markets have borne the brunt of the slowdown in world economic growth as all but the most dedicated investors have focused elsewhere, says Radhika Ajmera, head of global emerging markets strategy at Aberdeen Asset Management.
Year to 28 September, the Brazilian Bovespa Stock Index returned -39.82% and the Argentinean Merval Index -54.29%, both in local currency terms. Even the Mexican Bolsa Index, generally accepted as the strongest Latin American market at present, fell 16.83% over the period in question.
'The main concerns have been threefold: the weak global economy, lack of appetite for risky assets, and contagion fears given the uncertainty surrounding the macroeconomic situation in Argentina and Turkey,' says Ajmera.
'Improved global liquidity and further monetary easing will have a beneficial impact on emerging markets where the reduction in risk premium has an immediate impact in terms of lowering the cost of capital for these economies. It is interesting to note that the last two bouts of improved optimism both followed inter-meeting rate cuts from the US Federal Reserve.'
However, evidence of better macroeconomic data and a bottoming of global leading indicators would be a more durable catalyst, according to Ajmera. With emerging signs of a global economic turnaround, she feels better days should lie ahead for emerging markets.
Korean and Taiwanese exports are likely to be the first to give evidence of a turning point in the global cycle because of the high concentration of cyclical goods. New economy products represent 29% of Korea's exports and 36% of Taiwan's.
'Recent US statistics for new orders for electronics continue to paint a bleak picture but there are signs that old economy exports are stabilising,' says Ajmera.
Despite such positive predictions, emerging markets fund manager at Framlington, Jonathan Asante, believes there is no reason for short-term optimism in Latin America.
'Argentina is basically in a mess,' he says. 'The country has realised it has a zero fiscal deficit but the problem is how to implement a solution. One way is to cut expenditure but under the present economic conditions, this is not politically feasible.'
Brazil has also suffered a contagion effect from Argentina, according to Asante. 'The energy crisis in Brazil has knocked 2%-3% off GDP growth and the country still remains heavily dependent on foreign inflows,' he says.
'Brazil is waiting on the elections for next year. Its monetary and fiscal policy framework has only been in place since 1999 and no one is prepared to trust that this framework will still be in place after the election.'
The key driver for emerging markets remains the prospects for growth in the US, with the outlook for the technology sector especially crucial for Asian economies such as Korea and Taiwan, says Ajmera. 'Although short-term risks remain high, most notably in Argentina and Turkey, further global monetary easing and a bottoming of global leading indicators should ultimately underpin a period of outperformance for emerging markets, particularly given that the asset class remains under-owned by international investors,' she says. 'We recommend an overweight position in emerging markets on a 12-month view as a warrant on recovery in world growth.'
Old economy exports stabilising.
Further monetary easing expected.
Impending bottoming of economic indicators.
Argentina and Turkey remain highest risk.
Brazil contaminated by Argentina.
General lack of risk appetite.
Staying invested could prove lucrative
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