Re-emergence: This, below, is some of the things we have to keep in the corner of our minds. (Who told me that minds have corners? Perhaps mine is square) A steady stream of such news will eventually turn the tide. Money -that sought the USA save haven from the storm out there- will start flowing back. Out to the emerging markets. Result: Less liquidity in the US market. Perhaps some selling.
EMERGING MARKETS:
Re-emergence
A year after the Russian default and a little over
two years since the fall of the Thai baht,
emerging markets have been among the best
performing in 1999. Can this continue?
Asia
Rumours of the tiger's
extinction have been
exaggerated, at least in
emerging equity markets.
Asia has been the hottest
region this year, with the
IFC Asian index climbing a fat 54 per cent in
dollar terms. The recovery - driven principally by
a benign mix of low interest rates and stronger
export performance - has been sharper and
faster than expected. But the easy bit is
probably over.
Much of the rebound has been simply taking up
the slack left behind by the region's economic
crisis. But thanks to its speed, overheating has
already become an issue. Some economies
are indeed expanding alarmingly fast. For
instance, Singapore grew by 22 per cent
quarter-on-quarter between April and June. This
exuberance is threatening one plank of the
region's recovery: cheap money. Even if US
interest rates do not rise further, the next move
in Asian rates may well be up rather than down.
Nonetheless, any tightening should not be
severe. Some slowdown was always expected
in the second half as a recent Y2K-related
surge in electronics spending tailed off. The
challenge for governments is to press ahead
with corporate and financial restructuring - work
still very much in progress. Banks alone are
estimated to require about $30bn (5« per cent
of gross domestic product) to repair their
balance sheets. Increased equity issuance will
be a feature of recovering markets. Combined
with tighter monetary conditions, this suggests
Asian equity markets are likely to be duller
going forward.
South Korea
Of the Asian economies stricken by the
financial crisis of 1997-1998, South Korea has
made the most vigorous recovery. In stock
market terms, it has been the region's best
performing economy. Investors who piled in at
the start of this year have enjoyed a return on
investment of 80 per cent. This has mirrored the
return of strong economic growth. After
contracting by 5.8 per cent in 1998, GDP
growth this year is forecast by Credit Suisse
First Boston to be 4.1 per cent, rising to 5.3 per
cent in 2000.
The central issue for investors is how best to
restructure the heavily- indebted chaebols
which dominate the economy, a task which the
government has only just started to set about in
earnest. It has enormous clout over their banks,
thanks to last year's massive bail-out, but needs
to show it will force the pace of restructuring.
Developments at Daewoo are encouraging.
Following this month's government-led plan to
dismantle the rambling group, creditors are now
firmly in the driving seat of the proposed
debt-workout.
Public debt will escalate, given the cost of
tackling the corporate and banking problems
that thorough reform should reveal. But the
economy now looks robust enough to withstand
some tough decisions. Excluding Daewoo, the
top chaebols have now cut their debt/equity
ratios to around 300 per cent. However, they
remain far off the government's target of 200
per cent by year-end. Korea looks pricey
enough for now.
Russia
Russia heads the list of best performing
emerging equity markets in 1999. In dollar
terms it has outperformed the FT/S&P world
index by nearly 100 per cent this year thanks to
the boost from higher oil prices, last year's
devaluation and the return of liquidity to global
markets. Above all, there is relief the situation is
not a whole lot worse. By refraining from
wholesale money-printing, Russia has avoided
an explosion of inflation and further rouble
collapse. Although stagnation was widely
predicted, growth may even return in 1999.
But as the Bank of New York money laundering
scandal highlights, Russia remains a poor bet
for serious investors. In a kleptocratic culture,
good corporate governance is in thin supply. It
has been obvious for most of this decade that
Russia has been a financial revolving door.
While some $100bn of portfolio money and
official loans were pouring into Russia, about
$140bn of private money appears to have been
heading the other way.
Furthermore, there are already signs that the
benefits of the devaluation are starting to wear
off. And as the electoral season starts in
earnest, fiscal stabilisation is set to come under
severe pressure.
Unless Russia makes tangible advances in its
structural reforms, it is hard to see what will
sustain the stock market's continued
outperformance.
Latin America
Latin America has underperformed most other
emerging regions this year, with the IFC Latin
American equities index showing a gain of
"only" 18 per cent in dollar terms. In the short
term, this is unlikely to change. Like other
emerging markets it will suffer from Y2K worries
as the year end draws near. But it is also more
closely linked to the US economy and will thus
suffer disproportionately from any further rise in
US interest rates. And there are local political
risks to deal with: Argentina's upcoming
elections, the constitutional crisis in Venezuela
and Ecuador's slide into debt restructuring.
Longer term, however, the picture is much
brighter. Sure, most Latin American countries
still carry too much debt and could benefit from
further deregulation. But many of the basic
economic reforms that have yet to be tackled in
Asia and eastern Europe, were implemented in
the 1980s and early 1990s. Brazil's rapid
recovery from the depths of January's
devaluation is a testament to the region's
underlying strength. And, in general, financial
markets are both more liquid and more
transparent.
They are also cheap. Just taking equities,
Goldman Sachs expects average Latin
American earnings growth of 20-25 per cent
next year, in dollar terms. Yet the average stock
market price/earnings ratio is only 10 times,
compared to 16-17 times in Asia. 2000 could
be the year of the Latin American puma.
AT A GLANCE
Key Numbers
My Portfolio
EQUITIES
London Latest
London Closing
World Closing
World Indices
CURRENCIES
Exchange Rates
Pound & Dollar Spot
Int. Currency Rates
Money Rates
MANAGED FUNDS
UK & Offshore
CAPITAL MARKETS
Benchmark Govts
Int. Bonds
10-year Spreads
Emerging Mkt. Bonds
EURO PRICES
Euro Spot
EMS Ecu Rates
Euro-zone Bonds
Euro Trading Day |
