Last updated 07/May/2008
Overview
Bargain hunters for oversold, undervalued stocks led emerging markets to recover in April with fund flows into the asset class turning positive. Asian markets were among the best performers with China and India recording double-digit returns. The Chinese market benefited from a strong positive signal from the government who reduced the trading stamp duty from 0.3% to 0.1% as well as strong earnings in the banking sector. In addition to high commodity prices and continued foreign interest, stronger domestic currencies also led to higher returns in Latin America. While Brazil outperformed its regional peers, Mexico recorded a decline due to concerns of slower growth in the country's largest trade partner, the US. An investment grade rating by Standard and Poor's Rating agency further drove the Brazilian market. In Europe, the MSCI Turkey index ended the month up 15% in US$ terms after a 24% decline in March. While volatility is expected to continue in the short-term due to political uncertainties, the attractive valuations and long-term prospects of the Turkish market leads us to maintain a positive long-term view on the market. Russia continued to benefit from strong macroeconomic data and high commodity prices while the Hungarian market also recorded positive returns. The South African market outperformed its emerging market peers due continued global demand for raw materials and a stronger Rand.
Regional Update
Asia
China's economy grew 10.6% y-o-y in the first quarter of 2008, compared to the revised 11.9% for all of 2007. The slowdown was mainly due to slower export growth and heavy snowstorms in the earlier part of the year. Inflation, while lower than the 8.7% recorded in February, was a relatively high 8.3% y-o-y in March as a result of high food prices. The Central Bank raised the reserve requirement ratio by 50 basis points to 16% to slow lending growth and curb inflationary pressures. China's foreign reserves increased 40% y-o-y in the first quarter of 2008 to US$1.7 trillion in part due to trade and foreign direct investment (FDI) inflows. Domestic stock markets experienced significant volatility in March which eventually led the government to implement measures such as cutting the stamp duty on stock transactions to 0.1% from 0.3%, to support stock prices. In an effort to expand regional trade relations, China signed a free trade agreement (FTA) with New Zealand, its first such agreement with a developed country. Subsequently, China and Australia also agreed to resume negotiations for a FTA. China also called for the normalization of cross-strait trade ties with Taiwan as it signaled greater willingness to hold talks with the island's incoming government. In South Korea, GDP increased 5.7% y-o-y in the first quarter of 2008, higher than 2007's 4.9% growth, mainly due to higher exports. Growth, however, slowed down on a q-o-q basis, as lower domestic demand led private consumption growth to reach a three-year low of 3.6%. The government maintained its GDP growth forecast of 6% for 2008, despite expectations of slower global growth this year. Inflation maintained an uptrend with the CPI increasing 3.9% in March, higher than the Central Bank's 3.5% target for the fourth consecutive month. This led the Bank to leave interest rates unchanged at 5%. Pledged FDI into South Korea rose 70% y-o-y to US$2.7 billion as planned investments in the services sector rose significantly. Actual FDI inflows totaled US$7.7 billion in 2007. Foreign exchange reserves reached a new high of US$264.3 billion in March. Politically, President Lee Myung-bak's conservative Grand National Party (GNP) won a majority in the National Assembly. This should enable the president to work towards fulfilling his goals of higher economic growth and foreign investment.
Latin America
The Mexican government lowered its 2008 GDP growth forecast to 2.8% y-o-y from 3.7% mainly due to expectations of slower growth in the US economy. However, thus far, Finance Minister Carstens stressed that no major negative impact was seen on the economy as a result of the slowdown in the US. The Central Bank left its benchmark interest rate unchanged at 7.5% due to growth and inflation concerns. Inflation rose to 4.2% in March from 3.7% in February, remaining just within the Bank's target range of 4.0% to 4.25%. In the area of trade, export growth outpaced imports leading the country to record a trade surplus of US$636 million in March, its first surplus in more than two years. Exports rose 15.7% y-o-y mainly due to higher oil exports while imports were up 10.8% y-o-y. Domestic demand also strengthened with retail sales increasing 6.1% y-o-y in February, compared to 3.9% in January. Industrial output growth also accelerated to 5.4% y-o-y in February from 3.1% in January. International ratings agency, Standard & Poor's raised Brazil's long-term foreign currency sovereign credit rating from "BB+" to the investment grade of "BBB"- due to the country's improved growth prospects and fiscal management policies. Fitch and Moody's currently rate the country at one level below investment grade status. The market reacted positively with the stock market jumping 6% on April 30, the day of the announcement. Retail sales in Brazil rose 12.2% y-o-y in February as growth in wages, employment and consumer credit continued to drive consumer demand. The trade sector, however, did not fare as well. The trade surplus shrank to US$1 billion in March from US$3.3 billion a year earlier as exports declined 2.1% y-o-y to US$12.6 billion. Imports, on the other hand, continued to increase, albeit at a much slower rate. Imports were up 21.6% y-o-y, compared to February's 64.8% y-o-y growth. After 18 interest rates cuts totaling 850 basis points, the Central Bank embarked upon a tightening policy by raising its key interest rate by 50 basis points as inflation reached a twoyear high of 4.7% in March. The government plans to use a part of the frozen US$11.4 billion budget expenditure for this year to implement measures to stimulate the country's business and industrial sectors and boost economic growth.
Africa
In South Africa, the Central Bank raised its benchmark interest rate by 50 basis points to 11.5% due to inflationary pressures. Inflation continued to exceed the government's 3% to 6% target range with March CPIX (consumer prices excluding interest rates on mortgage interest payments) increasing 10.1% y-o-y. Major culprits included higher food and fuel prices. In the area of trade, both exports and imports recorded robust growth. Exports were up 25.6% y-o-y while imports jumped 31.6% y-o-y, resulting in a trade deficit of US$760 million. High metal prices and growing materials demand could continue to support export growth. Manufacturing output growth increased to 3.5% y-o-y in February, from 1.2% in January.
Europe
Government estimates put Russia's first quarter GDP growth at 8.0% y-o-y, in line with the 8.1% growth for all of 2007. This led the government to revise its 2008 growth forecast to 7.6% from 7.1%. Key drivers included robust investment and consumption growth. Investment in fixed assets increased 20.2% y-o-y in March while retail sales were up 16.5% y-o-y. Trade also recorded strong growth in the first quarter of 2008. Exports surged 50.7% y-o-y while imports jumped 41.9% y-o-y. Inflation remained high with consumer prices increasing 13.3% y-o-y. The Central bank subsequently raised its benchmark interest rate by 25 basis points to 6.5% to curb inflation. Politically, President Vladimir formally agreed to becoming the leader of the ruling United Russia party and its nomination for the position of prime minister next month. Given the party's majority in the Duma, Putin's appointment is assured. Consumer prices in Turkey rose 9.2% y-o-y in March, exceeding the Central Bank's target, mainly due to higher food prices. While the Bank left its policy interest rate unchanged at 15.25% in April, it signaled a tightening bias due to uncertainties in global financial markets. International ratings agency, Standard & Poor's revised its outlook on the country's credit rating from stable to negative due to increased political uncertainty. In politics, the parliament approved the pension reform legislation. The reform is expected to generate savings which could eliminate the deficit in the pension system in the medium term. Additionally, the International Monetary Fund (IMF) and Turkish government reached an agreement on a package of policies that should enable the completion of the final review of Turkey's stand-by agreement with the IMF in May. The completion of the review would also result in the disbursement of funds totaling US$3.7 billion to the government.
Feature of the Month: Q&A on Emerging Markets with Mark Mobius
To what extend will a recession in the US hurt emerging markets. Are there countries or sectors, which are strong enough to develop independently?
While there has been much talk about emerging markets decoupling from the US market, we do not believe a complete decoupling is possible because the world has become so interdependent. There is no question that the relationships between nations are growing because world trade and travel has been growing. But while the U.S. is still the largest economy and most influential, its influence has gradually diminished as other economies continue to grow at much faster rates. This has especially been the case in the emerging market countries where we are seeing new centers of economic wealth and growth. China, Russia, Brazil and India are clear examples. Also, note the very low correlation between local stock markets and the actual economy. The local Chinese exchanges have been extremely volatile of late, but the impact on Chinese growth seems to be close to zero. Chinese consumer spending remains strong and the economy is still recording double-digit economic growth.
What are the key trends in emerging markets at the moment?
Some of the fastest growing nations in the world today are the BRIC (Brazil, Russia, India and China) countries. The Chinese and Indian consumers are the world's new consumers and they along with consumers in Brazil, Russia, Turkey, the United Arab Emirates, Egypt, Mexico, Poland and many other emerging markets are becoming an important force in world consumption. Emerging markets remain attractive because they offer superior growth opportunities at historically low risk levels due to factors such as, but not limited to: privatization and deregulation of key industries; appropriate fiscal and monetary policies; stable political environments; improving corporate governance; enhancement of competitiveness through removal of subsidies and reduction of trade barriers; increasing productivity thanks to a young and increasingly well-trained labor force; and a huge domestic consumer base.
Which countries do you currently favor?
We continue to find at least some value stocks in most markets. Our portfolios currently have significant exposures to China, India, South Korea, Russia, Brazil, South Africa and Turkey. China is a well-known growth story. We expect growth to remain robust, albeit at a slower pace than we are seeing now. India continues to be a key centre for manufacturing and services, particularly in the pharmaceuticals and software sectors. The Brazilian economy has recorded strong current account surpluses, supported by record trade surpluses due to the high volume and prices of commodity exports. Russia remains an attractive investment destination due to its strong macroeconomic environment and huge supply of natural resources. Export growth coupled with a recovery in consumer expenditure in South Korea should support growth. Turkey is one of the cheapest emerging market countries at the moment with a P/E of just 8x; we believe that the medium term political risks have already been discounted. South African companies are rich in commodities and minerals, which are essential to the global economy.
Which sectors do you currently favor?
While we continue to follow our bottom-up investment strategy, our funds have significant exposures to the energy, materials and consumer sectors. Consumerism remains a major investment theme with higher emerging market population incomes resulting in greater demand for products and services. Energy stocks should continue to benefit from greater revenues and earnings as a result of high oil prices and greater global energy demand. Growing demand for raw materials in emerging markets, especially markets such as China and India as well as high commodity prices should support corporate earnings in these companies.
Do the recent market corrections make this a good time to invest in the markets?
I always say that the best time to buy is when you have the money since there are always bargains available. Bear markets tend to be much shorter in duration than bull markets and bear markets go down by a smaller percentage than bull market increases. This is why one must invest with a longterm view. Emerging markets provide investors with an attractive investment destination. In fact, the recent corrections in emerging markets have provided investors with attractive entry prices. We believe that investors should have exposure to a range of markets and sectors to lower their portfolio risk via diversification. The recent subprime issues in the US have showed us that developed markets are no longer as safe as perceived to be. And that emerging markets have risen to the limelight in recent years. Emerging markets are now seen to be "safer havens" as many major markets have built up foreign reserves and are growing at much strong rates than their developed counterparts.
What should be the ideal weighting of EM in a portfolio?
About 10% to 20%, depending on one's risk appetite, age and investment horizon. One simply needs to put short-term volatility into perspective, and achieve a sense of balance in one's investment portfolios depending on one's risk tolerance. One positive outcome of the recent turbulence is that investors have discovered the need to match their risk tolerance with their investment objectives and the time horizon over which they want to achieve those objectives. We believe that investors should have exposure to a range of markets and sectors to lower their portfolio risk via diversification.
source: dollardex
