India and Turkey have notched up impressive gains over the last three years. India’s benchmark index, the Sensex 30, closed above 11,000 for the first time ever on Monday and has risen 255% over the last three years in local currency terms. Turkey’s National 30 index has risen 335% over three years, closing above 60,000 for the first time ever at the end of February before it wobbled in response to the President’s veto last week of the Government’s choice of new Central Bank Governor.
They have been “two of the most crowded trades in the emerging equity markets”, says Michael Hartnett of Merrill Lynch. Foreign institutions ploughed US$6bn into India and US$9bn into Turkey in 2005, says Standard & Poor’s. But now, “compared with most other emerging markets, India and Turkey are expensive”, says Michael Sesit in the International Herald Tribune, trading on forward p/es of 20 times and 18 times respectively.
Both countries have their “attractions” and their “warts”, says Sesit. India’s 8% economic growth has been fuelled by exports, outsourcing and spending by an expanding middle class. But India also has “a rapidly widening current account deficit” and “high and rising inflation”, says Albert Edwards of Dresdner Kleinwort Wasserstein.
Turkey’s historically high inflation has been tamed, economic growth is strong at 7% and there are positive signs from its EU entry discussions. However, “at more than 6% of GDP, its current account deficit rivals that of the United States”, says Sesit. A rising interest-rate environment might hurt too. Emerging markets are “the asset class most dependent on easy money”, says Bank of America Capital Management’s Joseph Quinlan. These two markets, with their “excessive portfolio inflows”, are in a “classic economic bubble fuelled by too much foreign money flowing in”, says Edwards. When cheap credit comes to an end and foreign inflows start to dry up, then “typically the most vulnerable brick in the wall falls out”.
Published in Stock markets
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by
Annunziata Rees-Mogg
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