Brightening forecasts for economic growth will favour the emerging markets but a gap is appearing be...
Brightening forecasts for economic growth will favour the emerging markets but a gap is appearing between Latin American and Asia, says Susan Payne, fund manager at Emergent Asset Management.
This has been caused by fiscal and political uncertainties in Brazil, she argues.
A correction has occurred in Brazilian markets, she says, because of uncertainty about the outcome of the October elections and the fact that the left-wing candidate Lula is leading in the polls.
Brazilian bonds have fallen dramatically, Payne points out, because of fears the Government may have trouble meeting debt obligations, and the central bank has been slow to react with measures that could calm jittery investors and boost confidence in the markets.
This has had an effect on all emerging markets but particularly those in Latin America.
Payne predicts emerging markets will fall further in the coming weeks and that currencies in Latin America will continue to weaken. Both of these factors will impact on emerging debt markets, she adds.
Emergent currently favours Asia because it has good growth, low inflation, strong infrastructure and has already been through a crisis in 1997 that saw stocks devalued and corporate debt restructured.
Philip Ehrmann, head of Pacific and emerging markets at Gartmore, takes an optimistic view of the sector.
He says: 'A host of factors currently favour the emerging markets and are likely to do so for some time. The brightening outlook for the global economy is particularly positive for the sector, valuations are highly attractive, prospects for corporate profits growth are better than in developed markets and improvements in corporate governance and macroeconomic management are stimulating investors' appetite for emerging market risk.'
The global economy appears to be reviving, boosted by favourable fiscal policies and sharp falls in interest rates in 2001, Ehrmann adds. This will gather momentum this year and next, he says, benefiting emerging markets, which tend to be dependent on exports.
Growing domestic demand is an important factor in emerging markets, according to Ehrmann. He sees China, where rapid economic growth is boosting demand for consumer goods, as a prime example.
Domestic demand is also helping to protect emerging economies from downturns in the global economic cycle, he adds. Many emerging market corporations are fitter than in the past as a result of the severe downturn of the 1990s which encouraged companies to reduce balance sheet risk, Ehrmann argues.
However, at the same time, valuations are still cheap, although re-rating is starting to take place.
The choice of investments in emerging markets has also expanded, says Ehrmann.
In 1990, investors could choose from 12 countries, predominantly in Latin America or South East Asia, he says. Today, there are 22 countries, including China, India and South Africa to choose from.
Eastern Europe offers convergence play.
Asia offers good growth and low inflation.
Brightening economic outlook is supportive.
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