August saw more stable performance in emerging markets, ending a period of weak absolute returns. E...
August saw more stable performance in emerging markets, ending a period of weak absolute returns. Emerging markets are highly responsive to the economic fortunes of the US.
Weaker stock markets have, in part, been the result of investors' reaction to evidence recovery was emerging more slowly than had been anticipated. While this is indeed the case, the recent positive performance suggests investor confidence is beginning to improve.
While emerging markets as a whole rose in August, individual market performance was varied. Asia was the weakest region, with poor performance from Taiwan.
Latin America was stronger, led by a rally in Brazil. This more stable performance followed a period of considerable volatility. There has been a fall in the level of country risk due to more positive election opinion polls for the government candidate Serra. This has led to a stabilisation in the amount of fixed-income funds flowing out of the country.
Such conflicting trends are nothing new to the emerging market investor. The diversity of available opportunities means that at any one moment in time, there will always be some countries doing better than others. This can provide advantages to investors with a strong understanding of emerging market developments.
While, for example, the more stable situation in Brazil is encouraging, many question marks remain over the country's medium-term prospects. It is possible this recovery may well continue in the near term but the wider issues of financing the current account and fiscal deficits, and the consequent high level of the country's equity risk premium, will remain.
Elsewhere in the region, Mexico has many stocks with attractive earnings prospects and is displaying evidence of gradual economic recovery. In Asia, Korea continues to be supported by strong domestic consumption, while Taiwan is being affected by the continued weak global demand for personal computers.
Successful emerging market investment requires a longer-term focus. It is important to develop a portfolio positioned towards companies that show strong growth prospects at an attractive valuation that should benefit most when more sustainable signs of recovery emerge.
The mixed global economic data we have received to date, together with the emergence of accounting irregularities, has added to the nervousness in developed stock markets.
While this has affected emerging markets through the general increase in risk aversion, as a result of the various crises in emerging markets throughout the 1990s, there has already been a significant improvement in emerging market companies' attitudes and practices with regard to corporate governance and shareholder returns.
This has been demonstrated through the significant improvement in the average return on equity seen across emerging markets, which is now above that seen in developed markets.
This improvement in shareholder focus and attractive valuation levels should ensure there are many opportunities that deliver long-term rewards to investors.
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