"...emerging markets will grow faster than the
developed world for decades to come."

Gideon Rachman, The Financial Times

Opportunities in EEMEA group, Latin America

Opportunities in EEMEA group, Latin America

Many money managers believe emerging markets in Europe, Middle East, Africa have hit bottom and have nowhere to go but up

Many global money managers plan to increase their investments in emerging markets in 2003. These markets, they say, will benefit from strengthening global economic growth, and their upside potential is enhanced by their current inexpensive valuations.

In fact, the worst that can happen in emerging markets should risk aversion escalate, says Ramnath Iyer, emerging market strategist at Credit Lyonnais in London, is that cheap stocks get cheaper in the short term. In the long term, however, investors will be buying “near the bottom of what will prove to be a long-term bull market.” Consequently, global emerging markets will continue to outperform, limited by global factors that “will determine whether the outperformance is absolute or relative.”

Although they have earmarked a good portion of their money for Asia, global managers as a result see opportunities in Eastern Europe, Middle East and Africa — the EEMEA group — and even Latin America, despite the political and financial turmoil that makes those regions’ economic outlooks so fragile. They contend, however, that EEMEA markets are better positioned than Latin American markets.

“[The region] does not suffer from the imbalances of Latin America, while offering a defensive shield against oil-price surges and global instability in the form of energy and precious-metal plays,” says Iyer.
Although dependent on Western European growth, Central Europe does “not suffer from Latin America’s debt burden or depend on U.S. recovery,” Iyer says. It also promises robust domestic demand to support internal growth. Credit Lyonnais is overweighted in the Czech Republic, Russia and Turkey, and underweighted in Hungary and Poland.

London-based Schroder Salomon Smith Barney, a member of New York’s Citigroup, is likewise overweighted in Russia (and South Africa), but underweight in the Czech Republic and market-neutral in Turkey, Hungary and Poland. In its report, “EMEA Strategy: The Year Ahead,” the company states: “We expect a good year for EMEA [sic] equity markets, not a great year. Our dollar return forecast of 18% should allow the region to outperform developed markets.”

Latin America

On the other side of the Atlantic, Geoffrey Dennis, Latin American equity strategist at New York-based Salomon Smith Barney, also a Citigroup member, is firmly behind Latin America. He expects “a good year for Latin American equity markets in 2003 — the best since 1999.”

Dennis believes the markets in the region will go through two phases this year. Early in the year, the prospect of war with Iraq, concerns about North Korea and worries about global recovery could limit absolute returns. However, “returns from the region should increase as risk appetite rebounds and global growth expectations improve” later in the year, he says, providing a period in which Latin America should outperform other parts of the emerging-markets universe.

Salomon is entering 2003 overweighted in Mexico, Brazil and Peru. It favours telecoms, banks, cement/ construction and consumer goods in Mexico, and cyclicals, consumer goods and telecoms in Brazil. It is neutral in Venezuela, underweighted in Chile and has no investment in Argentina.

Credit Lyonnais has a different asset mix: it is underweighted in Mexico, neutral in Brazil and overweighted in Chile.

> Mexico. Although it remains the region’s safe haven, Mexico has lost some lustre. The country is beginning to lose contracts to countries such as China that offer lower wages, skilled workers and quality manufacturing capability, says Craig Millar, international equity analyst at Altamira Investment Services Inc. in Toronto.
Nevertheless, with 90% of its exports going to the U.S., it should benefit from economic recovery in that country, explaining Solomon’s overweighting. Credit Lyonnais, on the other hand, expects U.S. — and therefore Mexican — growth to be lacklustre this year, resulting in its underweighted position for Mexico.

> Chile. Chile will probably sign a free trade agreement with the U.S. in early 2003, which could help boost domestic confidence and attract foreign investment. However, “the Chilean market will remain dependent on global growth, copper prices and recovery in Brazil,” says Thomas Trebat, managing director of Latin American economic research at Salomon. Dennis warns that “stronger domestic demand is also necessary for a breakout,” explaining Salomon’s underweighted position in Chile.

Credit Lyonnais, on the other hand, is overweighting Chile on “defensive grounds”: low correlation with its neighbours; an export base that is not concentrated in any particular region; and low risk in its public and financial sectors of a sudden outflow of funds.


Dwarka Lakhan

Dwarka Lakhan

Dwarka Lakhan is a pioneer in emerging markets journalism in Canada. His first emerging markets article, “Africa Joins Ranks of the Emerging,” appeared in Investment Executive, Canada’s leading newspaper for financial advisors, in September 1994. Since then he has written hundreds of articles on the full spectrum of emerging markets and has conducted more than two thousand interviews with emerging and frontier markets investment professionals.

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