Financial markets across the world were ravaged in the aftermath of the terrorist attacks on the Uni...
Financial markets across the world were ravaged in the aftermath of the terrorist attacks on the United States. Though all regions of the world suffered from immediate sharp reductions in investor confidence, the shock was felt most intensely in the emerging economies.
All emerging economy regions saw sharp falls in share prices, emerging market bond spreads widened and vulnerable currencies like the Brazilian real were immediately under pressure. With relatively small falls in Hungary and Poland, the stock markets of the Europe/Middle East/Africa segment were hit less badly than those in Latin America or Asia.
Share price falls, widening bond spreads and currency jitters are the classic signs of deepening risk aversion and are not unexpected in view of the worldwide battering of investor confidence. Equally, the basic investment attractions of emerging economies have not changed relative to the prospects of the developed world. Before 11 September, emerging markets were sharing with the developed markets the effects of the slowdown in the world economy. When the eventual recovery in global growth and markets takes place emerging markets will become more attractive as they will be rising off a significantly lower base. In other words, current valuations in emerging markets could look very attractive in hindsight.
That said, the emerging regions will feel even more pain before the global economy picks up again. Turkey, Hungary and Brazil all have over US$1bn of debt falling due for refinancing over the next twelve months. The longer the economic recovery is delayed the more expensive these countries will find the new funds needed.
Many emerging countries have substantial tourist industries that will inevitably face dwindling arrivals. Rising unemployment levels in developed countries will slow manufacturing and assembly outsourcing, while some countries will be vulnerable to an inevitable slowdown in foreign direct investment.
When the unexpected happens, it is necessary to re-evaluate the outlook for all of the companies held in any portfolio. In Brazil, we sold our holding of Embraer, the leading global manufacturer of regional commercial jet aircraft, since the company now faces a changed outlook with the probability of cancelled and postponed orders.
In contrast, in China we sold CNOOC, the dominant oil and gas company because the stock rose on an upward move in the oil price, which we believed was a temporary response to the crisis.
Our fund has benefited this year from a significant exposure to China although our largest holding, China Resources, fell sharply after announcing marginally disappointing results at a time of market turbulence. Since we continue to believe that this is one of the best ways of gaining exposure to the development of China's economy, we added to our holding.
Falling stock markets offered other opportunities. We initiated two new positions, China Mobile, Asia's leading wireless telephone service provider, and Ayala Land, the leading residential property developer in the Philippines.
Sentiment towards emerging markets is unlikely to improve until developed markets, and Nasdaq in particular, settle down. This could be affected by anti-terrorist action.
That consideration aside, interest rate reductions should spark life back into the global economy within the next six months and equity markets could well rebound before this.
Interest rates remain low.
Plentiful liquidity in emerging markets.
Attractive valuations from lower base.
Continued risk aversion.
Costly international borrowing.
Attractive Poor demnd from the US.
Alan Nesbit is a senior portfolio manager at First State investments
Compared to 6% of 55-64 years olds
Sam Gold and Doug Abbott to take reins
Bionic advice for private clients
Creates £11bn asset management business