Asia remains the strongest emerging market in an environment where volatility is high and valuations...
Asia remains the strongest emerging market in an environment where volatility is high and valuations change rapidly, but Latin America continues to suffer from uncertainty in Brazil.
South America's largest country is in the midst of elections that look likely to see the election of left-wing candidate Lula da Silva, who won the first round. While this was not what investors wanted, the end of the elections could be good for the markets. Much depends on his reaction to events, who he appoints in his cabinet and as head of the central bank says Rob Brewis, director of BDT.
Russia is also showing strength because of oil and is proving to be an interesting market because of its geopolitical situation. It is becoming important as a non-Opec oil producer in the eyes of the US and president Putin is growing as an ally. 'Within oil stocks there has been a trend for improving corporate governance,' says Brewis.
'This has cut out a concern that existed in the past. It is a combination of better oil prices and better valuations as a result of corporate governance.'
South African mining companies have been a good market and regarded as a safe haven, he adds. However, moves towards black empowerment have caused a sell-off and there is some uncertainty about the future in terms of revenues. In Asia, there has been a downward revision of GDP growth but most people are still expecting reasonable growth this year and stronger growth next year, according to Brewis.
Korea and Thailand have seen some selling because of poor global markets and investors taking profits where they can, particularly in heavily foreign-owned companies.
The Bali bombing was a set back for South East Asia but is unlikely to have a lasting affect outside Indonesia, says Brewis. Despite short-term problems, the long-term demographic story in Asia is still powerful, he adds.
The bombing in Indonesia attracted the headlines but is of marginal impact in terms of investment across the region, according to Gerome Booth, head of research at Ashmore.
China looks strong, with third quarter growth better than expected at 8.1% year on year, fixed investment up 22% and exports up 29% year on year, says Gerome Booth, head of research at Ashmore.
In Latin America, the situation remains uncertain, says Booth, with da Silva's party showing unambiguous support for debt payments and avoidance of capital controls and indicating there would be an immediate presentation of policy measures post-election.
The fall of the Dutch government has added uncertainty to the pace of EU accession which could affect Eastern Europe, he adds, whereas in Russia the situation looks good, with industrial production and tax revenue in September better than expected
Fund manager comment: Invesco
Latin America has dominated emerging bond markets for the past 18 months ' first because of the Argentinean default and then because of economic and political concerns in Brazil.
Bond spreads have widened, but nowhere more so than for Latin America. Brazilian and Venezuelan 10-year bonds, for example, recently traded at about 2,300 basis points and 1,100 basis points over US Treasuries respectively. But while investors are cautious about Latin America during a period of risk-aversion, emerging market yield spreads compensate investors for the risk of default.
We should not let the focus on Latin America mask the attractiveness of the asset class. During the Russian default of 1998, investors indiscriminately sold emerging market debt, although unrelated regions were still paying coupons and had no intention of defaulting. The asset class has, however, matured in recent years. Asian and European emerging countries have decoupled from Latin America, supported by stable politics, favourable economic policies and high savings rates. Russia has returned about 20% in 2002, for example, in response to economic reforms and political stability. It may well be upgraded to investment grade status in the next three years, while Bulgaria and Romania continue to perform well as their economies converge with Western Europe.
Likewise in Asia, bonds have been stable, supported by high savings ratios, although yields tend to be lower. South Africa has also performed strongly, returning 17% in 2002 while enjoying favourable reviews from rating agencies.
Investors who have been underweight in Latin America and individual countries such as Turkey, which is over-indebted, would have achieved returns well in excess of the Index.
Simon Lue-Fong is emerging markets debt manager at Invesco
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