By Barbara Wall
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Emerging market assets are proving resilient in the face of a
weakening U.S. dollar and lower global growth expectations, but can
investors hold their nerve in what is a pricey environment over all?
Petek Kutucuoglu, head of research at GEM Global Equities
Management, said that consumer spending would be the key to unlocking
further gains in share prices next year.
In terms of export dependency, Hong Kong, Singapore, Venezuela,
Mexico, and Malaysia appear to be the most vulnerable to a slowdown in
the U.S. economy, as their exports to the United States make up more
than 20 percent of their gross domestic product, according to
But rising domestic consumption in countries with low debt levels
and high fiscal surpluses, like Thailand, Indonesia and Russia, could
help limit the negative effects of such a downturn and keep momentum
going, she said.
While peppered with caveats, this view is rapidly gaining adherents.
Allan Conway, head of global emerging market equities at Schroders
in London, has been happily buying consumer-oriented stocks in the
belief that domestic consumption is the only game in town.
"Rising domestic consumption means that emerging markets are no
longer as tied to the fortunes of developed nations," Conway said.
"Wherever you look in Asia, Latin America and Eastern Europe,
governments are improving the purchasing power of the population by
creating employment opportunities, increasing income levels and making
debt more palatable to the average borrower."
Consensus estimates indicate that spending power in emerging markets
is set to jump to $10 trillion in 2025 from $4 trillion today. Already,
Poland, with a larger population and lower per-capita income than
Denmark, has more people with the average Danish income than does
Denmark. Soon, China will have more people with a German income level
than Germany. Even if the worst happens and the United States tips into
recession, emerging market economies should continue to grow at around
There is more to a successful investment strategy than rosy growth
forecasts. Government policy decisions have to be right as well.
Thailand provided excitement in December with what could only be
described as a policy disaster. Worried about the strength of its
currency, the baht, the military-led government decided to impose a 30
percent tax on capital coming into the country. Within hours, after
seeing the stock market plummet more than 20 percent, the generals
changed their minds and eliminated the tax.
The consensus view is that this should be regarded as a one-time
thing, but as Julian Pendock, a fund manager with Bedlam Asset
Management pointed out, the reaction of equity markets to the event
highlights the extent of hot money and its response to currency
The team at Bedlam Asset Management, based in London, remains
focused on themes of increasing consumption and infrastructure. Pendock
is positive on Southeast Asia, where infrastructure spending has been
instrumental in putting money into the consumer’s pocket.
"Back in the 1990s, infrastructure spending was dogged by cronyism
and corrupt contracts for golf courses and other high-spend leisure
facilities," he said. "Today, government surpluses are being invested
in a more meaningful way. Shopping malls, office blocks and residential
building projects are creating the employment opportunities and income
levels that will support strong and sustainable consumer spending for
Stocks that could benefit from the mini infrastructure boom in Asia include which earns more than 40 percent of its operating profit in Asia.
Like Pendock, Vincent Strauss, head of emerging market equities at
Comgest Asset Management in Paris, is keen on the consumption theme,
but urged extreme caution about investing in China, particularly in its
financial sector. "Recent bank IPOs provide a worrying insight into the
euphoria that surrounds the Chinese market," Strauss said. "These are
institutions best known for inefficiency and bad debts, yet foreign
institutions are willing to pay vastly inflated sums to get a stake in
After initial public offerings in Hong Kong and Shanghai in October, the and China Construction Bank.
"Investors are effectively shelling out cash to enable the banks to make yet more bad loans — it is a joke," he said.
Strauss has been loading up on producers of consumer goods, like
in Hong Kong. "Goods producers have been out of favor because of tight
margins and limited pricing power but we are starting to see value
emerge in the sector," he said. "Although Weg has been hurt by the
strength of the Brazilian currency, it remains attractively valued and
has first-class management."
As a value investor, Strauss often finds himself investing in
unpopular sectors and regions. Like many investors, Strauss has
reservations about the South African economy, but is drawn to invest in
the country because of an abundance of companies with excellent
business models. His stock pick is Remgro, a holding company which has interests in manufacturing, financial services, mining and construction.
Strauss further suggested that the Philippines might be the market
that surprises investors most this year. "Philippines has been a serial
disappointer for years, but the earning power of nonresident Filipinos
is starting to have an impact on the local economy and specific
companies," he said.
It is estimated that $1 billion to $1.5 billion in remittances from
Filipino nonresidents were channeled into the country every month. In
this primarily Christian country, most of the money is sent to help
relatives, but a fair portion is invested in high end condominiums and
infrastructure projects, according to Strauss. His stock pick is SM Prime Holdings, the largest shopping mall developer and operator in the country.
Jonathan Asante, manager of an emerging markets portfolio for First
State Investments in London, recently returned from Eastern Europe with
a favorable impression of infrastructure projects in the region. He was
especially taken with in Israel that develops and operates shopping centers in Romania, Bulgaria and elsewhere.
"The Israeli-owned company now has Serbia in its sights, and if it
succeeds will be one of the first foreign development companies to make
its mark in the country," Asante said. "Plaza Centers is currently
trading at around net asset value, but its development pipeline is so
compelling the stock will be trading at a discount within a couple of
Unlike Strauss, Asante is not averse to dipping his toe into China. He holds one of Latin America’s great retail success stories," Asante said.