Four new factors have had a significant impact on emerging markets over the past three months. The c...
Four new factors have had a significant impact on emerging markets over the past three months. The combination of slowing global growth, events in Argentina and Turkey and instability in the Pacific region have weakened the short-term outlook by prolonging economic uncertainty, delaying future growth and raising risk premiums.
The overriding influence has been the slowdown in global growth and, in particular, the slowdown that we are now witnessing in the US. The knock-on effect for emerging markets has been very pronounced, as the historic correlation between growth of the OECD nations and that of emerging markets remains intact.
However, we believe sentiment will improve with the realisation of a soft-landing and the peak of the interest rate cycle being confirmed.
Second, and perhaps closer to hand, is the failure of the economic recovery in Argentina to materialise. This raises questions about Argentina's ability to meet debt repayments that fall due in 2001. Most of the debt is external and denominated in US dollars. The situation has been further aggravated by the continuing strength of the dollar.
The IMF has offered assistance and we await the announcement of a package aimed at furthering Argentina's economic reform while providing a measure of aid to meet the shortfall on its debt repayments.
Third, liquidity problems in Turkey have unsettled investors. While the IMF-backed economic reform programme has progressed, the banking sector remains far from stable. A credible banking sector restructuring programme, together with a supplementary reserve facility that covers the short-term repayment timetable is needed.
Finally, we have not escaped the worries created by ongoing political instability in some peripheral markets. Indonesia and the Philippines, in particular, are in limbo, with corruption remaining widespread. While uncertainties remain over the Taiwanese and Korean markets we continue to recognise the potential of China. Combined, these factors have raised the risk associated with emerging markets and lowered, for the short term, the potential returns.
We are once again seeing tremendous value emerge. Good long-term growth opportunities remain and, as ever, quality market and stock selection, backed by confirmation that the Western world's economies will not stall are required before these opportunities can be realised. We anticipate that growth rates across emerging markets could exceed that of Europe and possibly the US, too.
In the meantime, there remain good opportunities, especially Brazil. It provides the strongest fundamental picture among emerging markets and has benefited greatly from the economic reform which has been undertaken to-date. Expectation is for inflation to fall further allowing real rates to also be reduced.
Scott Crawshaw is fund manager, emerging markets equities at RSA Investments
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