The MSCI Emerging Markets Free Index fell 0.6% in January but was still up 2.3% over the quarter to ...
The MSCI Emerging Markets Free Index fell 0.6% in January but was still up 2.3% over the quarter to the end of the month.
This represented an outperformance of developed markets, with the MSCI Global Index falling 3.1% in January alone. Asia was the best performing region over the same period, up 1.7%, led by Taiwan's 12% rise. The EMEA region dropped 2.9% and Latin America 4%.
In the absence of any recent fundamental change in economic circumstances for emerging markets, political news has assumed a higher profile in Asia and Latin America over the past year. Indeed, Asia has enjoyed relative stability since the crisis of 1998, with current account surpluses, free-floating currencies, substantial foreign reserves and low inflation.
At the corporate level, falling debts and cost-cutting programmes are boosting profitability. In Russia, rising consumer confidence is exemplified by car manufacturer Lada recently slashing production by 44% as buyers instead choose higher-quality foreign imports.
However, high consumer-debt levels and the political outlook in South Korea paint a less rosy picture. Presidential elections, along with ever-more belligerent rhetoric from its northern neighbour, have had a negative impact on the country.
Meanwhile, Latin American equities have benefited from improving sentiment. In Brazil, the new government has indicated it will maintain similar policies to its predecessors, while the country's current account deficit for 2003 will be covered by foreign direct investment.
Investors have warmed to President Lula's new cabinet and spreads of Brazilian government bonds over US Treasuries declined in early January from 2,000 basis points to around 1,300.
In such challenging and volatile market conditions, we continue to focus on holdings with high-quality management, balance sheet strength and an ability to generate improvements in equity returns relative to the cost of capital.
We are particularly sensitive to valuation and utilisation of free cashflow to support dividend yields and the required investment in growth opportunities.
For example, in Asia, we favour selected Telecoms stocks; those that are that are highly cash generative, benefiting from strong growth, with no debt problems and for which falling capital equipment prices are making investment cheaper.
Intra-Asian trade remains strong, while the rapid expansion of China's economy has further boosted exports. In addition, Asia's already low-cost producers are boosting their price competitiveness by capitalising on China's cheap labour costs.
Greater FDI inflows to China and India also reflect investors' faith in the region's potential, a sentiment we share.
Thailand's economy has been stable during 2002 and its government proactive in stimulating domestic growth, with further room to cut interest rates. India's economy has also been strong during 2002 and would be boosted by any significant progress in the privatisation process.
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Economic stability in Asia and Latin America.
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