Emerging Market Investment Prospects and Strategy

Emerging Markets

Divergent tendencies in the economic performance of emerging markets are expected to persist for the foreseeable future, which still makes a dependably compelling case for a discriminatingly selective strategy for investing in developing stock markets in Asia, Africa, Latin America and Central and Eastern Europe, Middle East and Africa (CEEMEA).  Incongruences in projected macro-economic growth rates among emerging markets and regions through 2015 make it imperative that investors focus on emerging markets idiosyncratically, rather than collectively – for example, BRICs (that is, Brazil, Russia, India and China).  Five Asian, two Latin American and three CEEMEA equity markets as well as Panama, a frontier market, provide distinctive equity investment options for risk-avid investors.

Total Returns of Composite Emerging Asian, Latin American and CEEMEA Stock Markets

Total Returns of Composite Emerging Asian, Latin American and CEEMEA Stock Markets

Asian Developing Markets

Asymmetrical economic patterns of Asian developing markets distinguish those worthy of over-weights from those deserving market-neutral and below-market emphases.  China, Taiwan, Philippines and South Korea earn over-weights because of their respectively superior economic outlook vis-à-vis the rest of the region.

By virtue of its immense manufacturing prowess compared with mature and other emerging economies, China’s anticipated vigorous growth rate in excess of seven percent should encourage investors to keep its shares market an overweight in the months ahead.  Even though the anti-corruption campaign launched by the twenty-three month-old regime of President Xi Jinping and Premier Li Keqiang has succeeded in ensnaring numerous high-ranking Communist party members and government officials, its increasing centralization of power in Beijing seems at odds with the principal intentions of Xi and Li, who promised greater market liberalization from the inception of their reign of power.  Nevertheless, Global Markets Intelligence (GMI) is convinced that the policy-setting apparatus will resume its bearing and accomplish its objective of rebalancing the economy in favor of domestic consumption at the expense of foreign demand, thereby yielding faster economic growth and rendering China’s shares more appealing to investors.

Increasing signs of speedier implementation of reforms by the ruling BJP government in New Delhi merit India a compelling overweight.  A continued gradual overhaul of the remaining seventy-five percent of the subsidy regime following the termination of diesel fuel price supports earlier this year owing to the precipitous decline in petroleum prices of late should proceed to entice investors to expand their portfolio exposure to domestic equities.

The Taiwanese, Philippine and South Korean stock markets also warrant over-emphases on account of their stable political regimes, reliable policymaking climates and healthy economic prognoses.

Latin American Emerging Markets

Disparities in the economic fortunes of Latin American countries help to discern which regional markets are most and least likely to outperform in the period ahead.  In light of their regimes’ commitment to economic and political reform, Mexico and Colombia earn their corresponding shares markets unambiguous over-weights.

Mexico, though beleaguered by extensive political corruption and drug cartel violence, is deserving of an over-weight insofar as President Enrique Pena Nieto’s cabinet remains undistracted in its pursuit of a faster growth trajectory for the economy through current liberalization measures of the oil sector (that is, PEMEX) and the telecommunications sectors as well as further deregulation of the other sectors in an effort to improve their competitiveness.

The case for over-emphasizing Colombia remains persuasive in spite of the nation’s vulnerabilities to trends in world trade.  The government’s resumption of negotiations with the Revolutionary Armed Forces of Colombia (FARC) insurgency in Havana, after the FARC released an abducted army general in just three weeks, seems relatively promising for the eventual outcome of the talks.  Yet, whether or not it results in long-term peace and tranquility for the violence-torn nation depends on the willingness of the FARC to strike a deal with Bogota.  While GMI remains hopeful of the two sides reaching a mutually agreeable pact, economics and policymaking still favor Colombia’s investment outlook.

Central and Eastern European, Middle Eastern and African Developing Markets

Disharmonious macroeconomic trends and discernible differences in policymaking climates set apart three CEEMEA equity markets – Poland, Hungary and Israel – for over-emphases, all of which have leeway to ascend higher in performance thanks to relatively low historical absolute valuations.

GMI recommends over-weighting Polish shares for the determination of the new regime under Prime Minister Ewa Kopacz to adhere to the steady policy course she inherited from former Premier Donald Tusk and his team of economic advisors.  Encouraging economic prospects and a stable policymaking climate will keep the Warsaw stock exchange a desirable destination for foreign investment.

Hungary too remains an over-emphasis, in our opinion, regardless of the unorthodox policy stances that have been adopted by the center-right government under Premier Viktor Orban.  The Central Bank of Hungary’s overly relaxed credit posture, with its policy rate presently at 2.1 percent, appears contradictory in view of the deflationary tendency of the country’s cost of living.  Nonetheless, a strong three-plus percent economic growth forecast for next year, combined with an anticipated rise in the current account-to-nominal GDP ratio of the same magnitude and a likely fiscal deficit-to-nominal GDP quotient of under three percent, make the Budapest shares market a relatively attractive opportunity for investors abroad.

Despite recent political upheaval and an imminent nationwide election, Israel remains a very appealing avenue for equity investing.  A vigilant monetary policy conducted by the Bank of Israel and careful management of fiscal policy by the Likud-led ruling political alliance would spell increased investor confidence if, as we expect, Prime Minister Netanyahu is returned to power in a modified governing coalition following the balloting on 17 March 2015.

Frontier Markets

Panama remains our only overweight selection among frontier markets because of its relative political stability, solid fiscal commitments and ongoing infrastructure projects (expansion of the canal to accommodate larger ships and extension of the metropolitan rail system to improve transportation in the capital, Panama City).

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