Wednesday, July 08, 2009

Market Outlook For Emerging Markets

On the Edge Financial Daily: Mobius: Outlook for emerging markets remains positive

  • KUALA LUMPUR: The outlook for emerging markets remains positive to their relatively strong fundamental characteristics and faster growth than their developed counterparts, says Mark Mobius.

    Mobius, who is Templeton Asset Management Ltd executive chairman, said on July 8 while some emerging economies contracted in early 2009,
    most are expected to return to positive growth by end-2009 or 2010.

    “In the face of the global economic slowdown, the major markets of China and India continue to record exceptionally robust growth rates. China and India are expected to grow by 8% and 6%, respectively, in 2009,” he said.

    Emerging economies are in a much stronger position to weather external shocks following the accumulation of foreign exchange reserves.

    The growing middle class in emerging markets is an important and strong contributor to growth, he added. Emerging markets account for more than 80% of the world’s population, providing them with a strong purchasing power and the ability to spend their way into growth. At the forefront are markets such as China, India and Brazil.

    Another area that is poised to support economic growth in emerging markets is investment, particularly in infrastructure.

    “This is another area in which we have seen governments boost public spending in markets such as China and India. More importantly, the current valuations of emerging markets remain attractive,” he said.

    In his assessment of the second quarter of 2009, he said emerging markets surged with the MSCI Emerging Markets index returning 34.8% in US dollar terms.

    Mobius said part of this return was due to weakness in the US dollar. A return of confidence in emerging markets, the desire for higher returns and the search for undervalued companies support the markets’ uptrend.

    Latin American and Eastern European markets were among the strongest performers during the quarter while most Asian markets also recorded strong double-digit returns.

    A rebound in commodity prices and stronger domestic currencies supported markets in Latin America. Asian markets continued to attract significant portfolio inflows allowing markets such as China, India and Thailand to outperform their regional counterparts.

    In Eastern Europe, Hungary returned 69.7% in US dollar terms in part due to a strong Forint. Poland returned 37.0% in US dollar terms, while Russia ended the quarter up 37.8%.

    Turkey was among the top emerging market performers with a return of 57.2% in US dollar terms. A stronger Rand led the South African market to end the three-month period with a 31.3% gain in US dollar terms.
Chart of EEM.

From Apollo Investment Management, Claire Barnes were rather cautious in her 2Q report despite her stellar fund performance. Here is a snippet from her comments.

  • Three months ago we reported an abundance of quality/growth options at attractive prices. Many of the more promising participated fully in the market's surge. By end-June, we had net gains of 36%, 99% and 164% on the three stocks which we added in 1Q. Several leading companies report that they see no signs of green shoots, but have anyway doubled in price. Valuations are now much less compelling. We are back to carefully weighing the relative resilience and prospects of businesses for the long haul, against a backdrop of economic turbulence which we expect to continue, and possibly to intensify.


How very true! Have we not seen it here? Despite the no signs of green shoots, some of them shares simply rocketed to the moon!

  • Governments, disappointingly, have 'wasted a good crisis'. Not only have they thrown away unimaginable amounts of taxpayers' money, postponing necessary adjustments, and impoverishing future generations. Not only have they missed opportunities for intelligent reform and appeared to be victims of 'regulatory capture'. Not only have they flouted the established hierarchy of creditors, imposing unwarranted losses on the prudent, and distorted the allocation of capital. They have also failed to seize the opportunity to reexamine market fundamentalism, to lead intelligent debate on the appropriate goals of societies, and to forge a new consensus on effective moves towards a more sustainable future.

    Perhaps such leadership takes longer, and will emerge in due course, as adrenaline-fired weekly panics give way to consideration of the longer-term issues. The
    2009 Reith lectures offered a worthy start to a necessary debate.

    We mentioned that the economic crisis may intensify. Papering over cracks serves only to obscure the necessity of remedial action while the problem gets worse. The patchwork of quick fixes will have unintended consequences. Crises in pensions, insurance, government finances, housing foreclosures, etc, may be visible long after their worsening becomes inevitable, long after they become impossible to avert - but long before they reach bottom. The same will at some stage prove true of energy resources, and environmental damage. The timetable for these is less forecastable: they could be decades away, but the possibility that they may intensify suddenly should be borne in mind. Planetary and bureaucratic overload, like military blowback, lend themselves to the models of catastrophe theory, and may reach tipping points with little warning.

    How to plan for energy and environmental contingencies, we are not at all sure. Fortunately, it seems likely that there will be better times to act. The stampede for inflation hedges may be premature (forced and voluntary deleveraging may outpace the printing presses for a while). Exchange-traded funds have made the establishment of long positions in commodities more convenient for many, and more investors now seem to be viewing commodities as appropriate for large asset allocations, changing historic price relationships. In
    John Hussman's phrase, it may be 'hard for investors to sustain a durable sense of doom about inflation risk', if we have a period of subdued prices or deflation meanwhile. Likewise for resource shortages: some 1970s analysis still reads well, but many market participants would regard three decades 'too early' (even if intended as a warning) as tantamount to being wrong. However, early warnings are valuable. Investor views on appropriate long-term strategies would be welcome.

    Meanwhile, the attempt to recreate the market economy of 2007 seems both doomed and foolhardy. Many industries will not quickly return to 2007 levels: some will never be the same again. We are wary of future predictions for most 'luxury', several types of retail and consumer goods (spending patterns may change for decades), the auto industry, many types of capital machinery, and construction equipment... among others. We nevertheless hold some shares in these sectors, if the risk-reward proposition remains reasonable, but many of our holdings are in other sectors where business is relatively predictable - supermarkets, fast food, consumer finance, aircraft maintenance, basic telecommunications - and life, for the time being, goes on.