The emerging markets are still waiting for a global upturn to push them into a bull market. In the m...
The emerging markets are still waiting for a global upturn to push them into a bull market. In the meantime, area-specific problems are dominant, like Argentinean debt for Latin America and sluggish Western imports for Eastern Europe.
Michael Hughes, client portfolio manager at JP Morgan Chase Fleming, says: 'The cuts in interest rates are positive news for the emerging markets. In the 1991 global economic downturn, when the Fed lowered interest rates and economic performance started to improve, emerging markets boomed.
'Again in 1998 when there were the beginnings of economic downturn and the Fed cut rates there was a massive upturn in emerging markets. The emerging markets is entering another one of these cycles.'
Martin Taylor, fund manager of the Thames River Nevsky Fund and the Thames River Eastern Europe fund at Thames River Capital, says it is too early to make a call on how global growth will impact the emerging markets.
However, liquidity is now incredibly high which usually means the market is near its bottom. Thames River is taking a cautious view at the moment given that global growth indicators are still deteriorating. Nevertheless, Taylor says the markets are likely to bottom in the next three months.
Taylor points out that Latin America has been hurt by Argentina which is currently approaching insolvency. It would have to default if it weren't for the IMF putting money back into the system.
As for Argentina's neighbour, it seems that the Brazilian markets have already priced in a lot of the negative impact if Argentina defaulted.
JP Morgan Fleming uses a bottom up stock picking process and looks for companies that are extremely liquid. Hughes is currently overweight in Mexico, Taiwan, Korea, India and Hong Kong, as in those countries he has found companies with low price earnings multiples.
In addition, Hughes expects countries that are converging with the EU such as Poland, Hungary and the Czech Republic to perform well. He explains that every time a country has joined the EU extremely good returns have been made. This is what happened in Ireland, Spain and Portugal and he expects the same will occur in Eastern Europe.
However, Taylor says Poland and Hungary are being hurt by Germany because of reduced export demand. Both these countries send approximately 40% of exports to Germany and are both suffering because of the reduced demand.
fund manager comment: Foreign & Colonial
Corporate Russia is in better shape than ever before. Recent tariff increases and cost cutting efforts have pushed public utilities into profitability. A wave of M&A activity and significant investment in some industrial sectors has occurred and should help to drive earnings and economic growth going forward.
There is a clear sense of purpose among policy makers that was missing throughout the Yeltsin years, and the presidential administration has the power to implement policy in a way that simply did not exist before. These factors should help generate positive reform news flow in a number of areas over the next several months.
Risk remains firmly on the external side. While so far this year Russian share prices have been somewhat resilient to weak global markets, this may not last if sentiment on the US/global economy takes another lurch downward. Russia continues to run large twin surpluses so even if bond market contagion materialises from Argentine and/or Turkish currency adjustments, it should prove short-lived.
The investment case for Russia remains intact: an effective, pragmatic and increasingly powerful government is driving a structural reform process that should bear fruit over coming months; the economy is growing fast; companies are profitable and inexpensive; and there is fairly robust insulation from fundamental knock-on effects of the global slowdown.
The combination of Argentina and Turkey driving up EMBI spreads, low summer liquidity and an absence of reform news while parliament is in recess, is likely to make the market drift lower through August. This could provide an excellent opportunity to add to this market.
Douglas Helfer is fund manager in Emerging Europe at Foreign & Colonial Emerging Markets
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