Investors are rediscovering emerging markets at a rate not seen since the asset class was the invest...
Investors are rediscovering emerging markets at a rate not seen since the asset class was the investment world"s hottest ticket in the early 1990s, say fund managers.
With renewed appetite for risk, and drawn by both the demographics and reforms, money is pouring into economies growing around four times faster than developed markets.
Asia is a very different place from the one plunged into financial crisis in 1998, and now offers equity investors one of the most exciting opportunities in the world, says John Crawford, director of Pacific Specialist Equities at Henderson Global Investors.
"Asia used to be a deficit economy where domestic growth was fuelled by cheap capital, which was unsustainable. But now it has surpluses across the board, and it is the US which sports most of the deficits," he says.
Asian countries hold an estimated $1.5 trillion in foreign reserves, equivalent to around 25% of the total US bond market. "Sound fundamentals are underpinning the markets, which were up 40% collectively last year," says Crawford. "But this is not yet fully priced in. Dividend yields are the same as Europe."
China is the region"s growth driver as it transforms itself from an agricultural economy to an industrial one, from a demand-led economy to one that is market driven.
Massive infrastructure building, especially along the coast, has been boosted by foreign investment, up 10-fold in China in the last 10 years. New emerging industries have created new jobs, driving domestic consumption higher.
In India too, demographics and economic fundamentals combine to produce GDP growth of between 5 to 8%, fuelled by a swing to high growth sectors and increasing consumption from the one billion plus population, 54% of whom are under 25.
Sanjiv Duggal, director and CIO Indian Equities at HSBC Asset Management, says corporate profitability is improving, and return on equity is one of the highest forecast globally. "Despite a strong run last year, valuations are still compelling. At 14.5 times earnings, the market is below its long term average."
Meanwhile the cost of capital has plunged from around 12% in 2000 to 5% now (against the five year Government bond yield). "We expect investment to pick up, as there has been little for the last 10 years and this will also drive GDP growth," says Duggal. The cost of manufacture in India is 10% of what it is anywhere else and exports are set to rise from $14bn to $40bn in the next five years.
"After the general election in May, and we expect the current government to get back with a strengthened mandate for reform," he adds. "The market is unloved and under owned. Foreign investors own 14% of the Indian market compared with 20% in China and 40% in Taiwan and Korea. They are only just beginning to realise the breadth of opportunity this market provides."
In Europe, Turkey has been a strong performer over the past year, and in Latin America, interest rate cuts and attractive valuations marked out Brazil.
"Last year proved to be profitable for emerging market investors, but despite the 56% dollar gains the asset class continues to trade at a discount to developed markets. This augurs well for prospects in 2004," says Brian Coffey, emerging market fund manager at New Star Asset Management.
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