The continued sell-off in the emerging markets has given rise to attractive looking valuations in a ...
The continued sell-off in the emerging markets has given rise to attractive looking valuations in a number of markets, where in some instances prices have retreated to 2005 levels. Year-to-date falls of 67% and 64% in China and Russia respectively look overdone and could well provide an excellent entry point for investors.
While undoubtedly the global economy will slow down further from this point, very few of the emerging markets themselves will suffer recession, but will merely grow at a reduced rate.
The Chinese market in particular appears to offer long-term growth potential despite fears of a significant slowdown. Chinese authorities have ensured that the economy is less reliant on US demand today, with greater emphasis on developing export growth through demand from other emerging economies, particularly in the Far East. We are also encouraged in the way China has established trading links among many African markets in order to create new demand for exports.
Fears of inflation have been a justified concern when investing in the emerging markets and this will remain a risk moving forward. In the short term, however, inflation looks far less of a risk with the recent sharp falls in energy and food prices. This can be seen as a strong positive as it allows domestic consumption growth to remain strong.
Latin American markets also suffered sharp falls from peak levels reached in May, and this was closely related to the dramatic fall in commodity prices. As with China the falls have left the market looking reasonable value. While markets such as Brazil will remain strongly reliant on commodities, we feel opportunities exist in many other areas, most notably financials and infrastructure.
The Russian market saw a 14.6% fall in September but an even greater decline in October, which caused the regulator on several occasions to close the stock exchange. Despite an unclear geopolitical outlook the market is inexpensive and is trading on just under 5 times 2009 earnings, with earnings growth around the 30% level.
Not all emerging markets look to offer such long-term potential and in the case of a number of the Eastern European emerging markets, it may be better to wait in the short term before committing monies.
Many of the Eastern European economies are running significant budget deficits or have rapidly rising rates of inflation.
The smaller Eastern European countries such as Latvia and Estonia have suffered a fall-out following the collapse of the property boom.
It is hard to make a solid investment case for these countries, but overall the opportunity to invest in those emerging markets that are reducing their dependence on exports to the developed world and building new export markets with other neighbouring emerging markets is looking increasingly attractive.
- By Tony Yousefian, OPM Fund Management
- Falls in emerging market shares mean many markets are now looking good value
- The best-placed are those economies building trade links outside the developed world
- Eastern Europe is best avoided for now because of deteriorating fundamentals.
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