Interest rate changes continue to be the driving force behind economic expansion and strong investme...
Interest rate changes continue to be the driving force behind economic expansion and strong investment opportunities in the emerging markets.
Rate reductions in Latin America and Indonesia are spurring domestic demand, while rises in Korea are benefiting banking stocks.
Michael Reynal, manager of the Principal Global Emerging Markets fund, says: "Consumer spending in both Asia and Latin America should be supported by lower interest rates and global demand for locally made goods and products."
He is forecasting growth in Latin American to be 6% and Asia 4% for 2006. This compares with a global growth forecast of 2%.
In Latin America, Reynal sees the most opportunity in Brazil, as rates continue to fall, dropping from 18% in January to 15.25% in July. One stock he favours for this reason is state-owned bank Banco do Brazil
Reynal adds: "A part of the bank's mandate is to lend money to the agriculture sector. Crops have not been producing and farmers have had difficulties paying back their loans. A reduction in rates have helped improve their balance sheets and the bank is no longer suffering from the sector not being able to pay back its debts."
Lower rates have also left consumers with more money in their pockets to spend on luxury items, says Reynal.
He believes consumers are likely to spend more money on fashion goods. One example in the Principal portfolio is clothing retailer Renner.
He says it is a brand name people like and want to wear, while still being reasonably priced.
Another country benefiting from a recent quarter point reduction to 12.5% is Indonesia.
James Syme, head of global markets at Société Générale Asset Management, believes the reduction, while only marginal, will prompt consumer spending and as a result he expects the economy to grow by 5% for 2006.
He says: "We have positioned our portfolio towards stocks that have exposure to retail and commercial lending like Bank Rakyat.
"The bank revealed in its last annual report profits had increased by 5.4% from the previous year."
Syme also believes demand for sophisticated electronics, particularly mobile phones, will rise as people become wealthier. One stock, which he anticipates will benefit from this domestic story is Telkom Indonesia.
Elsewhere in the emerging markets, Reynal favours Korea. He says despite four rate rises in less than a year to 4.25%, consumer spending has not been affected, as people look to credit to buy goods.
One stock he likes is Kookmin Bank, which has become one of the leading beneficiaries of consumer lending.
China has also become a domestic story as consumer wealth increases in the country, according to Reynal.
Like Indonesia, Reynal expects the Chinese will spend their money on mobile phones.
He says China Mobile is one company well placed to profit from this extra spending because it has a strong brand name and has been the first telecoms firm to target the Chinese market.
Also in China, Syme has positioned the Global Emerging Countries fund towards sectors that will profit from the increased use of electricity as the economy expands.
Emerging markets still a domestic story
Middle class is developing
Banks gain as people use credit to spend
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