Investors looking for markets with the potential to deliver attractive capital gains should consider non-Western markets, advises Michael Hughes, chief investment officer of Baring Asset Management.
Hughes said: “The Asian markets still have potential to move higher, with price-to-earnings valuations still at the same level as 30 years ago. The interest we saw in China in 2006 has the potential to transfer to the other regional markets in 2007, and we see plenty of investment potential there.
“Outside Asia, Eastern Europe still looks attractive, particularly Russia, and Latin America is likely to be another beneficiary of the continuing commodity boom in 2007. Another way of playing this could be to look for a properly diversified commodity fund. We have seen the first phase of the commodity cycle, and the indications are that soft commodities could do very well next year.”
Hughes believes that the global economy is about half-way through a ‘deflationary’ boom, in which economic growth is unhampered by the inflationary pick-up seen in previous booms because of increasing competition brought about by globalisation. The two main threats from here are the potential for further weakness in the US dollar and the possibility of a shock in the credit markets.
Hughes said: “The US dollar is fairly valued at present, but were it to fall further in 2007 this could lead to problems if Europe and Japan take retaliatory action. Another potential problem is related to the low interest rates current enjoyed around the world. This has encouraged high levels of borrowing on the part of companies and individuals, and tempted many investors into private equity funds, but leaves asset prices potentially vulnerable to shocks in the credit markets or any changes in interest rate policy”.
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