In financial terms, it is easy to equate the emerging markets universe with some of the exotic holid...
In financial terms, it is easy to equate the emerging markets universe with some of the exotic holiday destinations that can be found in the constituent countries. They are traditionally the place everybody wants to be when prosperity is rife, but global investors prefer to batten down the hatches and stay at home at the first sign of uncertainty.
Consequently, it is refreshing to see funds flow data from EPFR Global illustrating that investors have continued to put their faith in emerging markets in recent weeks, despite the difficult backdrop. This is also reflected in market returns, which demonstrate that the bourses of the Asia (ex Japan) region have been the place to be thus far in 2007.
The "decoupling" of Asian markets can be partly attributed to the strength of local consumption - which means the respective economies are less dependent on global growth than has historically been the case - and this is also true of the broader universe. According to research carried out by UBS, around a quarter of emerging markets' exports were shipped to North America at the turn of this century, but the figure has now dropped to around 16%-17% as intra-regional trade has gathered momentum.
A number of commentators have suggested it is no surprise to see emerging market equities faring uncharacteristically well in the recent turmoil. The fact is many emerging economies are in much better shape than their developed counterparts and the flow of investment capital to Asia is actually an extension of the risk aversion theme. Furthermore, we are continuing to see commodities prices edging up, which is good news for the resource-rich economies of Latin America and parts of the EMEA region - notably South Africa and Russia.
Nevertheless, we must recognise any extended period of economic turmoil among some of the world's largest economies is not a backdrop conducive to rational thought or strong stock market performance. For now, it is appropriate emerging markets are continuing to outperform their developed counterparts, but if global sentiment deteriorates, it is likely other areas of the financial spectrum will be regarded as more robust safe-havens.
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