Emerging market equity investors have experienced a volatile journey in 2006. In the early months of...
Emerging market equity investors have experienced a volatile journey in 2006. In the early months of the year, markets continued to rally strongly as oil and commodity prices rose further.
However, a significant correction followed in May as investors fled from risky assets on concerns that higher interest rates would lead to slower global growth. Over the summer confidence returned and markets have risen close to previous highs.
A number of issues cloud the skyline in the short term. Interest rates have increased globally and high commodity and oil prices have pushed up inflation. A global slowdown would have a serious impact on companies in emerging markets, especially those which export consumer goods or commodities.
The emerging market universe is also vulnerable to political risk. The regimes of Bolivia's Evo Morales and Venezuela's Hugo Chavez are pursuing unpredictable populist agendas, while the rising popularity of Jacob Zuma suggests longer-term risks for South Africa.
There is also concern in Eastern Europe, in particular Hungary, with its poor fiscal track record and large current account deficit making it vulnerable to short-term capital flight. Recent unrest in Budapest has highlighted the problems faced by the country.
Meanwhile, Russia is underlined with equity investment risk. The centralisation of political power is mirrored by concentration of wealth and declining regard for minority shareholders. With a high oil price, Russia does not need foreign capital and seems increasingly less inclined towards good corporate governance.
Political developments in North Korea could unsettle markets. The country is situated in a strategically important area close to China, Japan and Russia. The totalitarian regime of Kim Jong-il may launch further missile tests in an attempt to secure better financial terms in negotiations about its nuclear programme. Further instability in the Middle East could lead to a dramatic spike in the oil price with negative implications for the global economy.
However, despite uncertainties economic growth should continue to be well above world average. In EMEA (Emerging Europe, Middle East and Africa) Turkey is a favourite where, for the first time in a decade, a correction in the currency is not expected to result in banking sector bankruptcies. Improved banking supervision and continuing tight fiscal policy suggest Turkey deserves to trade on a higher rating over the medium term.
In South Africa, the policy framework and banking sector are robust. Elsewhere, investors are positive on Israel, where quality companies with excellent growth prospects trade at cheap valuations. In Latin America, the Brazilian government is committed to pursuing tight fiscal policy and the economy remains strong with solid external accounts.
In the Far East, the Chinese and Indian economies are major beneficiaries of the outsourcing trend in manufacturing and services. The new tiger of Vietnam will become an important location as the economy continues to grow strongly and the stock market becomes more liquid.
In Malaysia, stocks are attractively valued for the first time in nearly a decade. Despite recent political instability, Thailand, will continue to provide a stable, pro-business environment with a number of attractively valued companies.
It is expected that the market volatility will continue short term until the outlook for inflation, interest rates and global growth is clearer. However, investors should remain positive on emerging markets in the long term and continue to pursue a bottom-up investment approach, holding companies with quality management, superior market positions and strong financial structures.key points
Confidence returned after May correction
Uncertainty remains in the short term
Investors should remain positive in the long term
Clarke replacing Balkham
'Deep-dive analysis of client behaviour'
Ways to mitigate April’s increases
The best equity income funds examined