While few investors can have missed this year"s rebound among global equity markets - both developed...
While few investors can have missed this year"s rebound among global equity markets - both developed and emerging alike - we believe comparatively few are aware of emerging markets" outperformance. And as the US" third quarter earnings reporting season gets under way, we believe emerging markets remain well positioned to continue delivering strong performances in the months ahead.
Emerging markets" recent outperformance has largely stemmed from the cyclical upturn in the global economy, and nowhere has this been more evident than in China. Here, the 9.9% figure for gross domestic product in the first quarter of 2003 tells a very clear story, while more recent data indicates that Chinese and intra-Asian activity is as strong now as it was before the spread of the Sars virus.
While much of China"s expansion to date has been export led, this has begun to filter through to the domestic economy. Given our expectation of strong domestic growth, we believe the focus will shift away from export-oriented companies to those that will benefit from a burgeoning domestic economy. Indeed, this is an investment trend that we see developing not only in China but elsewhere in Asia as well as in Latin America, and one that we believe will continue to underpin emerging markets.
Within Asia, countries such as Taiwan for instance, that have traditionally relied on US demand for semiconductors and other high-tech components, should see the benefits of China-induced intra-regional activity filter down to the consumer level in due course. The South Korean economy has been benefiting from the growing demand for semi-conductor chips, with companies like Samsung Electronics among those driving the market.
Turning to Latin America, Brazil is probably the most obvious example of a country which has positively surprised investors over the past year. The Brazilian economy was expected by many to collapse following Lula"s election as president at the end of 2002. This collapse has singularly failed to materialise as the new administration has shown itself both prudent and capable of delivering the sort of sound policies that the international investment community sought.
As a result, inflation has fallen faster than expected, trade activity has recovered and interest rates are beginning to fall. There is a real prospect of further significant declines in nominal and real interest rates which will provide an ongoing boost for the domestic economy, and a yet more positive background for equities.
Other Latin American countries that are responding positively to the upturn in the global economy are Chile and Mexico. Chile"s economy is of course largely driven by the price of copper and other base metals - their recovery is in turn providing a boost to the domestic economy as sentiment improves.
While concerns remain over Mexico"s external economy - the US automobile sector on which Mexico is heavily dependent is not yet as buoyant as in past years - the outlook for the domestic economy is more positive. Here, low domestic interest rates will stimulate housebuilding and other domestic-orientated industries, providing what we consider should be worthwhile investment opportunities.
In contrast, we have some reservations about the prospects for Central European emerging markets, as well as for others within the EMEA category. For a start, the attractions of economic union with Europe are now largely built into Central European equity markets. Yet we believe there is scope for surprise on the downside given that these countries have very little room to manoeuvre if the transition to monetary union proves challenging with regard to their management of budgetary criteria.
To return to those emerging market regions in which we have greatest confidence -Asia and Latin America - we believe there are several fundamental reasons for their economic expansion to continue and for their markets to continue outperforming. The progress many companies have made in terms of restructuring and becoming more transparent is obviously important, as is the rehabilitation of the banking sectors of many of these countries. Another major reason, of course, is the improvement in the global economy that we are now beginning to see. The US" third-quarter reporting season is widely expected to reinforce this trend, and judging by results issued so far this has already begun to happen.
We consider the upturn in emerging markets this year is more justified than the recovery that has taken place in some western equity markets.
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