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Judge case-by-case in re-emerging markets

Just six months ago Latin American economies seemed set to follow their Asian and eastern European counterparts over the precipice. But low and behold, emerging markets around the world are not only holding their own but in many cases rallying.
The best performers in the first quarter were Latin American funds, followed by global emerging market funds and Asia. Only eastern Europe slipped into a negative return.
Most analysts have their own theories for the solid performance of these markets, and their own favour-ites, but it seems likely that the Asian crisis which sparked off the crisis has resulted in a different way of assessing country risk. Nation by nation analysis has replaced the regional analysis which was prevalent last year. This means funds are more likely to cherry-pick, especially where new economic policies are proving successful.
The best example of this is Brazil. The currency de-valuation at the beginning of the year was expected to exacerbate the economic crisis gripping this massive regional economy.
But the appointment of Arminio Fraga, a former fund manager for financier George Soros, as president of the central bank, was the indicator for a recovery on the stock exchange.
Shaun Roache at ING Barings, in London, points out that the appointment was only one of a number of influences on investors.
“The stability which the new policies have brought are reflected through the economy. Inflation is down, interest rates are coming down and growth estimates are good.”
He continues: “It is clear that the policy on fiscal restraint is working, and we are seeing a sustainable, structured, recovery.’’
Roache is quick to point out the dangers of lumping Latin American markets together, and extrapolating optimistic predictions for the region as a whole. “One needs look no further than neighbouring Argentina to see an economy with a number of problems. Because the political structure is different to Brazil, it is struggling to reform and bring an overvalued currency under control.”
The other market mover is Mexico, says Roache, which again has to be viewed as a distinctive economy. “We are very positive about Mexico, because it has more or less de-coupled itself from the region, and can be said to be behaving more like a north American market, as opposed to one with Latin American roots.”
But he warns that Mexico may be a little expensive compared with Brazil, the latter’s Bovespa index trading at around 11 times earnings, while Mexico’s Bolsa has a multiple of 16.5.
Douglas Polunin, portfolio manager for Pictet TF Emerging Markets Fund is less bullish about Brazil, and predicts that it will weaken again.
Using replacement costs as a build-in to his valuation system, Polunin is negative on Latin American valuations. Asia, however, is he believes still offering good value.
“In times of crisis when earnings predictions are unreliable we believe our valuation system gives a more accurate picture,” he says.
To that end he is very positive about India, Malaysia and Thailand, and also predicts that China is turning toward recovery, while he is still underweight in Taiwan.
He also confirms that many fund managers are stillfavouring South Korea where the economy grew 3.1% in the first quarter after a disastrous 1998.
The good news and resilience does, it seems, spread across the Pacific to Asia too. But what of eastern Europe, particularly in the light of the latest political crisis in Moscow?
Quite what it will take to get investors back into Russia, apart from rising oil prices making positions in local oil companies attractive, it is difficult to say. But the problem for other markets such as Hungary, Poland and the Czech Re-public has been that they have been squeezed by un-certainty over Russia and falling demand in western Europe, particularly Germany, a significant export market for all three.
It is likely that to compensate for poor export results, these countries may have to keep interest rates higher than they would like to attract deposits and bond trading.
Not all is doom and gloom, however, and the nimble investor can still find bargains in the Baltic countries, although the Kosovo crisis has caused the recovering economies of Croatia and Slovenia to stumble. So eastern European markets are being buffeted by a third force, the war in former Yugoslavia. Hungary in particular could suffer if the large Hungarian minority in Vojvodina comes under threat. So the mid year re-port on emerging markets is something of a curate’s egg.
There is good news out there, but investors would be advised to examine individual economies as the regional certainties seem to have disappeared for good.

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