Emerging economies are undoubtedly leading the way out of recession, but the big question in every investor’s mind is whether their recovery is sustainable or whether a correction of some kind is looming. “We need to see earnings that support these share prices,” says Alex Tarver, product specialist, global emerging markets, at HSBC Global Asset Management. “If there is any sign that some of these rallies are not justified, there could be a small pull back, or a big pull back, more likely a pull back of some kind.”
The MSCI emerging markets index jumped 85 per cent as at August 12, since reaching a four-year low on October 27 in 2008, outperforming the MSCI World Index, which increased by 39 per cent since November 20 last year, its lowest point during the same two-month period. The real driver behind emerging markets growth is Asia; recently released data from the four emerging Asian economies which have reported global gross domestic product (GDP) figures for the second quarter – China, Indonesia, South Korea and Singapore – show that these economies grew by an average annualised rate of more than 10 per cent.
These results are even more impressive when considering that the developed economies are still in a recession, although the Eurozone has shown initial signs of recovery as the region’s two biggest economies, Germany and France, announced an unexpected growth of 0.3 per cent in the second quarter, after having each suffered four consecutive quarters of negative growth.
Recent estimates from the International Monetary Fund (IMF) indicate that, by 2013, emerging economies’ contribution to GDP will overcome that of the developed countries, as it will grow from the current 48 per cent to 52 per cent. As a consequence, it is expected emerging markets will steadily increase their weight in terms of market capitalisation at global level.
“Markets are driven by strong economic and profit growth,” says emerging world guru Mark Mobius, executive chairman of Templeton Asset Management, who oversees $25bn (E18 bn) of emerging market assets. “If a country has a strong economic growth, its companies will generate profits,” he says.
“With markets like China, which is growing at 8 per cent, or India, growing at 6 per cent, Asia is top of our list,” says Dr Mobius, emphasising that now that valuations are “a little rich” compared to late last year, stock-picking is more important than ever.
Markets like Latin America, Eastern Europe or Russia, are also looking very interesting on an individual company basis, even if they are not growing as fast as Asia. “In some of these countries, companies are going out of business, and the strong companies can get market share,” says Dr Mobius. “We are picking the survivors, those who have a strong balanced sheet and that are going to take market share.”
In terms of sectors, consumer stocks look attractive. With rising per capita income and strong demand for consumer and other goods, the earnings growth outlook for these stocks is positive. “We want to get exposure to any company involved in services and products for the consumers; this includes consumer banking,” he says.
Commodity stocks also look attractive. “With the tremendous increase in money supply that we are
seeing globally, commodity prices will continue to remain high and maybe even go higher,” says Dr Mobius.
Manpreet Gill, Asia strategist at Barclays Wealth in Singapore, believes that Asia is and will remain the most economically dynamic region in the world, both in the short and long term basis. But he also emphasises that it is important to be more selective. “We still like the region,” says Mr Gill explaining that they have been overweight Asia ex-Japan equities since late March-April, “but on a relative valuation basis it is not cheap anymore; it is fairly valued but it is beginning to be slightly pricey.”
China, for which Barclays Wealth expects a growth rate of 9.6 per cent in 2010, is one of the most attractive economies, for its strong growth rate and export side.
the risk of correction
“We expect China to lead the world out into a recovery,” he says, admitting though that the risk of correction there is closer than for any other markets. “A risk of correction is valid for the whole region, but we may see it coming a little sooner in China than anywhere else, because the economic data have been the strongest and the policies have been put in place the earliest in China than anywhere in the region, and also because it is one of the highest beta markets.”
