| Emerging market a useful, but often misleading category |
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| 30/05/2004 | |
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All emerging markets are not equal, although the concept of "emerging market" is a useful shortcut for economies that have modernised over the last decades and that now gives numerous, albeit risky, investment opportunities on the 4 continents. Analysts at PIMCO note that "investors, with the benefit of over a decade of experience with this asset class, have learned to discriminate among emerging market countries, reducing the potential for one country to significantly affect returns from the asset class as a whole." Only a light-hearted investor would indeed put on the same footing markets as Argentina and China, although both are easily cramped into the same "emerging market" category. For fixed income securities, the country's fundamentals remain the focus of the investment decision, says Mohamed El-Erian, of PIMCO. "We believe that a highly differentiated approach to individual credit, or country, exposure is required. We are placing particular emphasis on countries with improving policy fundamentals that also fit naturally and comfortably in the Chinese production and consumption chain . Such countries include Brazil and Russia which have both sustainably increased their trade links with Asia in general and China, in particular." Market trends When it comes down to equity, some countries are in the spotlight, while other are not, creating great investment opportunities according to Jules Mort, an emerging market manager at Threadneedle Investments in London. "Latin America does not capture the headline", he says. "That's a forgotten asset class and that is why the return has been good", pointing out that Latin American markets have outperformed the Asian ones over the last decade, a fact which often goes unnoticed. Moreover, says Jules Mort, many of the companies in Latin America's big markets, mainly Brazil and Mexico, operates in a very uncompetitive market and have gone through crises that have solidified their fundamentals. "There is a survivor bias in the companies we invest", says Threadneedle's Jules Mort. Other region as different as Eastern Europe, Turkey, or South Africa, all offers different characteristics. "Eastern Europe should normally be the defensive region. It is less geared to global growth. Russia is a commodity market, which is very different and Central Europe is geared toward the Euroland, which is a benefit in itself", explains Maarten Jan Bakkum at ABN AMRO. However, "Turkey is a risky country, with a big debt problem, like Brazil. Things have gone pretty well in an easy environment, but now that the environment is more difficult, Turkey becomes more of a question mark", points out Maarten Jan Bakkum of ABN AMRO. "Asia is least likely to be impacted in view of its lower dependence on portfolio flows and the deeper roots of internal and regional demand components. Latin America is hard hit initially due to the high liquidity of its external debt markets (particularly Brazil). Russia is in the middle", assesses Mohamed El-Erian. J.L. |
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