Out with the old, in with the new?

Happy New Year from funds europe.
We wave goodbye to the Noughties and start 2010  here in the UK amidst
pleasingly crisp winter snow and a strong focus on developing rather
than developed markets.

In his roundup of the year ahead, Richard Urwin, BlackRock’s head of asset allocation and economics highlights the strong recovery already seen in some emerging markets in 2009.

“The global economy began to bottom out in the spring of 2009, and during the second half of the year, clear evidence of global recovery emerged,” says Urwin. “While the pace of recovery was fairly subdued by historic standards in the developed economies, in some emerging markets the pace of recovery was very rapid.”

At the same time, emerging market specialists such as Ashmore and Silk Invest lay out a compelling investment case for newer markets. In a commentary entitled ‘Why emerging equities?’, Jerome Booth, head of research at Ashmore, reminds us that “Emerging markets represent the bulk of humanity and industrial production, and around 50% of global GDP using purchasing power parity.”

He goes on to highlight the reasons why emerging-market equities should trade at a premium to developed equities. First, high and reasonably static levels of savings will be channelled away from financing leverage and consumption in developed countries into domestic investment. This will create an investment boom that will result in growing liquidity and size in both traded and pre-IPO emerging-market stocks – the largest IPOs are now regularly in the emerging markets not the developed world, says Booth.

But the most important point, in Booth’s view, is that, relative to developed markets, emerging companies are in environments without big credit constraints. “In this environment, they will be taking market share from developed competitors over the coming years, starting with banks, as is already becoming apparent,” he predicts.

Meanwhile, Silk Invest, a specialist in the Middle East and Africa, highlights similar issues to make the case for new-market debt.

“Many of these countries have low levels of debt outstanding and hard assets (resources) as collateral,” writes the Silk Invest team. “Local currencies have been underperforming during the recent US$ decline and we believe that the time has now come for fundamentals to trigger an upward revaluation. Bear in mind that many countries have only started to roll out their debt program for a variety of reasons, many which are constructive.”

Silk Invest puts forward the view that “the world is increasingly going to realize that the US Dollar is now less linked to the fundamentals of the US economy and is increasingly regarded as the currency of this world, more specifically, that of the new world”.

Silk Invest’s prediction for 2010? The elements are aligning in favour of the new world. Of course, they would say that, wouldn’t they – and, as always, time will tell.

Fiona Rintoul, Editorial Director
©2010 Funds Europe