Fund manager's comment/Bill Barron
A number of emerging markets have shown surprising resilience this calendar year, given the global economic environment surrounding them. The Chinese, Russian and Mexican stock markets were among the strongest in the second quarter.
In Asia, exports continue to fall, impacted by weakening demand from the US in particular. Taiwan's export orders dropped 14% year on year in May while Singapore's industrial production fell by 11%.
Performance in Latin America has also been mixed. Argentina's debt crisis is casting a shadow over the region and resulted in its bond and equity markets weakening by a third since early June. Credit-rating agencies Moody's and Standard & Poor's both cut Argentina's rating, forcing the government to pay rates of 14% on a new issue of bonds this month, compared to 9% in June. With the IMF apparently reluctant to extend the $40bn support package agreed last December, the Argentine government may be forced to choose between defaulting on repayments or drastically reducing expenditure.
In Brazil, the economy grew 4.1% year on year in the first quarter. However, concerns over ongoing power shortages and rising interest rates may slow economic growth over the second quarter.
Mexico had a very positive first half of the year, its stock market rising by 18%. However, the ongoing slowdown in the US economy is starting to take its toll on both exports and consumer confidence, the most vital components of its GDP. The currency also appears overvalued at present.
Argentina's debt problem, coupled with the Turkish currency crisis (its peg was abandoned in February), has reduced investors' appetite for emerging market equities. Currencies have come under particular scrutiny as previous emerging market currency devaluations (Mexico in 1994 and Thailand in 1998) were followed by severe weakness in emerging markets worldwide.
However, key factors that drive emerging markets are still in evidence. US interest rates have fallen and money supply is growing in both the US and Europe. Strong liquidity in emerging markets should help offset concerns over slowing global growth. We expect the OECD leading economic indicator to turn positive in the second half of 2001, further boosting prospects for equities.
We favour China for its strong economic and earnings growth, financials because of restructuring and falling US interest rates and telecoms, which offer attractive valuations and strong revenue growth. Our two key sector bets are telecoms and financials. Emerging market telecoms stocks are attractively valued, their share price having fallen alongside their developed market peers despite enjoying significantly higher growth.
Supportive liquidity in markets.
Attractive valuations in some sectors.
Increased appetite for risk among investors.
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