Ashmore’s Jerome “all markets are risky, but an emerging market is defined by having the risk priced in” Booth has released his outlook for emerging markets in 2009.
He still thinks they’re the place to be, but he’s more cautious on the asset class than he was this time last year.
Booth believes EMs may be affected by the ongoing financial market turmoil in the following ways:
a) A speeding up of the shift of economic power to China and emerging markets in general
b) Greater inclusion of emerging policy-making as the G20 rises in importance relative to the G7
c) A major shift in risk perception as investors realise that the binary approach of denoting some countries and investments as risky and others as safe is illegitimate — all countries are risky
d) A big shift in asset allocation to emerging markets, with the home-country and equity biases coming under strain
e) A major shift in (EM) central bank reserve management towards lower reserve levels and a significant diversification out of Treasuries and Dollar assets into emerging markets
f) The start of consequent long term decline in the dollar
Moreover, he asserts:
EM countries could recover much faster in 2009 than the developed world as there is less de-leveraging necessary and EM does not suffer from the banking sector crisis afflicting the developed world. Historically recovery is much slower where there has been a banking crisis.
The prospect is thus for global recovery in 2009 being led by growth recovery in EM.
Inflation may return as a risk as first the broad definition of US$ money supply may increase rapidly when banks resume lending and the banking multiplier kicks in again; and also should commodities recover on strong EM growth recovery in H2 09.
Those EM countries which manage to pass through the credit crunch in good shape (the vast majority) and which then credibly control inflation (the majority) could see currency appreciation followed by major investment booms starting in late 09 and 2010.
Ashmore sees major opportunities in dollar denominated sovereign and corporate debt. Investors may also be able to benefit from “opportunities to purchase individual strategic assets and whole EM portfolios of assets from global players in certain industries wanting to shed their EM components.”
As for EM equities (which appear to have fallen out of favour with shell-shocked investors lately), these offer “substantial value but will recover after credit markets in EM and will remain linked to some degree to developed world equities. Hence they may be an investment for later rather than earlier in the year, depending on how global markets fare.”