The high price of oil is unlikely to affect consumer confidence to the point of creating a hard land...
The high price of oil is unlikely to affect consumer confidence to the point of creating a hard landing for the US economy, according to Jerome Booth, head of research at Ashmore Investment Management.
Booth expects to see prices rise to $40 a barrel. He believes consumer confidence could fall if high oil prices continue but he doubts this will be a major issue.
Tim O'Dell, fund manager at Investec, says: "We are not concerned about the threat of a hard landing in the US. Interest rates are unlikely to increase further because there are signs that manufacturing has slowed. Central banks are on course to remove excess demand and they have the option to cut interest rates. Consumer confidence is high and unemployment has fallen in the US."
With only an outside chance of a hard landing, Booth favours emerging markets as the place to invest. He says: "The macro situation in Asia has turned around in countries such as South Korea." Ashmore is focusing on Asia to take advantage of the underlying value it believes is being created by the reform process. However, Booth believes a diversified portfolio across the emerging markets is the best strategy to use.
He adds: "Russia has turned around both politically and economically, with growth of around 7%. The growth has been micro-driven and influenced by government policy, oil prices, Putin's tax reforms and the devaluation of August 1998.
O'Dell says: "In the global equities markets economy-sensitive sectors, such the cyclicals and the industrials, are hurting at the moment. Technology, media and telecoms stocks are also suffering due to concerns over their high valuations and the price of licences."
Confidence in emerging market creditworthiness, as measured by the JP Morgan EMBI yield spread over US Treasuries, has shown a remarkable recovery since the Russia GKO default 14 months ago, according to Rupert Walker, associate director and portfolio manager at AIB Asset Management.
The spread has halved from about 16 percentage points to just over eight, he says, noting that only over the past six weeks has the spread started to widen, having closed below seven percentage points at the end of August.
Dollar-denominated emerging market debt has had a good year, says Walker, and this has been justified by improvements in many country's fundamentals, and hence their ability to service debt. Mexico was raised to investment grade status by Moody's, Brazil's recovery from crisis is likely to prompt a higher rating, Russia has benefited from devaluation and strong oil revenues and Turkey has implemented parts of its IMF reforms, he adds.
However, Walker acknowledges potential threats to this positive state of affairs. First, a slowing US economy, without a compensating pick-up in Europe or Japan, could squeeze exports from emerging markets. Second, investors' aversion to risk could grow, forcing up the cost of borrowing.
"The latter should be brief, unless the US economy has a harder landing than expected," Walker says. "If there is a crisis, then emerging markets look likely to be victims rather than the cause."
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