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Tuesday, September 12, 2006

Emerging Market Outlook & How To Play It

By Yaser Anwar, CSC of Equity Investment Ideas

Capital flows to BRIC have been strong in recent years because of the widening trade surplus and strong foreign direct investment. Foreign capital is also attracted by the high domestic interest rates in countries such as Brazil.

India’s current export growth of 22% is one of the highest in the emerging world. Buoyed by the export sector the GDP growth continues to exceed market expectations.

In China, the authorities have been allowing faster money supply and credit growth, as investment is accelerating again. Since the summer of last year, Japanese and German export growth of machinery to China has been increasing.

The developing deceleration in global growth points to lingering risks for emerging markets. However, falling unemployment and rising consumer credit growth is pushing up private consumption growth to a structurally higher level.

Emerging market fundamentals indicate that share prices have not yet reached a secular top like they did in 1994. For example, the current and forward multiples are currently on average 12 compared to around 26 in 94.

Domestic liquidity is abundant thanks to robust workers' remittances and a strong tourism sector in Brazil, China & India. Many developing economies have been running a current account surplus, which has allowed them to decrease their debt burden. Debt & inflation dynamics are much better than they were in the 90s.

Whether the recent rebound in emerging market equities will be sustainable has yet to be seen. However, the bull market will resume in the months ahead after share prices discount the current global growth slowdown.

Investors can place their bets on the emerging markets through the following exchange traded funds: Vanguard Emerging Markets ETF (VWO) & iShares MSCI Emerging Markets Index Fund (EEM). For a more comprehensive list & the right ones for your retirement and/or taxable accounts, click here.
UPDATE 1249 AM: A reader's comment below reminded me of a story I read in Reuters today that pertains to this topic:

“As China evolves from a nation of savers to one of borrowers and investors, banks are salivating over the prospects, but risks loom in a market where consumer credit is a novelty and competition is intensifying.

By global standards, China's 1.3 billion people have only dabbled in financial services. While households have stashed away some $2 trillion in savings, rates of credit card usage, mortgage loans and car ownership are among the lowest in the world.

That is changing fast as China's surging economy creates an expanding consumer class. JP Morgan expects retail lending in China, including mortgages, credit cards and car loans, to grow from US$247 billion currently to US$1 trillion by 2010.”

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