| Emerging markets : growth trajectory intact |
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| 26/11/2006 | |
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The multi-year bull-run in the emerging markets, which has handily outperformed all other asset classes may cause some investors to take pause, yet it remains underpinned by a number of key metrics, suggesting that the cycle still has plenty of fuel to run on. The MSCI EM Free Index relative to the MSCI World Index shows five years of outsized double-digit equity gains starting in 2001. The overall P/E ratio for the class is still the lowest at 9.7 compared to 14.7% in the U.S. 12.1% in the UK. Threadneedle Investments in London recommends an equity overweighting in China over India. While the two economies remain steadfast on a growth trajectory, China's growth rate is expected to finish the year at 10% ahead of India's 7.9%. Year-to-date, inflation has been tracking 1.3% in China compared to 6.4% in India. In the area of foreign direct investment, the former has seen inflows of $55bn into plants and goods versus $9bn for the latter. And while India's public sector debt as a percentage of GDP soars at 70%, China's remains relatively low at 14%. On a price-to earnings basis, China is relatively cheap at 13% compared to 16% for its rival, though this is justified partly by a lower corporate earnings growth rate and a higher political risk premium in the case of China. Awash in credit Looking at the debt markets,, the question is what's different in this credit cycle compared to the last? Since 1998, when the Asian contagion resulted in severe credit downgrades, the average credit rating on emerging market debt has climbed from almost BBB- to nearly BBB+, reflecting lower default risk. According to UBS, there is a strong credit cycle underway in the emerging markets. The annual average from 2005 to 2007 (estimate) has been 37% in Russia, more than 25% in India, 15% in China. As an asset class, the emerging markets is priced as a cyclical but growth is structural," according to Threadneedle. "A strong domestic credit cycle is in place in countries with high trade surpluses. Growth is secular, not cyclical," largely due to improvements in economic management in the areas of fiscal policy, debt reduction, lower default risk, and the falling cost of capital. V.B. |
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