Once concerns have subsided about the millennium date threat to computer systems, emerging markets l...
Once concerns have subsided about the millennium date threat to computer systems, emerging markets look likely to regain investors' attention in a big way. Most institutional investors are now bullish about Asia. The level of cash in both global and regional funds has fallen and the consensus is that the gains represent a solid recovery rather than another bounce.
Through 1999, the Korean stock market rose 217% in sterling terms, and even the worst Asian performer, Taiwan, rose over 24%. But returns from Asian funds have varied from 159% to just 5.2%. Fortune has favoured the brave. Funds that lingered in cash or maintained high weightings in Australia, which many used as a proxy for cash, have suffered.
This time last year Templeton's Mark Mobius was buying stocks he had had an eye on for months, and was openly advising others to take advantage of excellent value on offer. But many managers, especially those based outside the region, were wary after the battering they had experienced, and did nothing.
Conventional wisdom is that local managers do better when developing markets are falling, while foreign-based players have the edge once the recovery gets going. This year will test that theory. The biggest and easiest gains have probably already been made and from here it is a stock pickers world. Month on month, funds that are light on defensive stocks such as utilities and more exposed to cyclicals and smaller companies are doing better.
However, Asia is not the only opportunity within the asset class. Latin America, which was neglected through 1999, has shown respectable gains. There has been a bout of profit-taking ahead of the New Year but overall the IFC Latin America Index is up around 35% in dollar terms year on year. The rally could go higher given global economic stability, recovery and growth and rising commodity prices.
Investor confidence has grown with smooth political transitions in Mexico and Argentina. Many Latin American currencies are now reasonably competitive and equity valuations are attractive. More importantly, foreign investors appear prepared to accept more risk. The evidence is the falling spread on emerging market debt and on Moody's AAA rated corporate bond.
However, the focus is likely to remain on the larger, more liquid stocks for the early part of the year. Interest also centres on Mexico and Brazil, which between them account for two-thirds of the region's market capitalisation. Argentina, Chile and Peru are all still underweight in most portfolios.
The big imponderables among emerging markets for the coming year are Russia and China. Both cast long shadows over an otherwise promising sector. Russia's war in Chechnya will throw next year's budget off track. Debt rescheduling is unlikely to make any progress and any issuance is frozen until international markets are more receptive. The suspension of IMF loans has removed the one effective form of policy leverage on Moscow.
China, Russia's new political ally in the face of Western criticism, is facing huge economic upheaval which the powers in Beijng may not be able to manage. The catalyst for change will be China's entry into the World Trade Organisation, which itself has been rattled by the protests that marked its recent meeting in Seattle. The year 2000 presents huge opportunity, but big risks remain.
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