Funds: emerging markets go it alone
By
Senior Writer
Jody Clarke Sep 25, 2009
Print this article
Since Argentina defaulted on $20bn of bonds in 2001 it's been a pariah, unable to borrow in the international markets. Last year, it expropriated $25bn in domestic private pension funds to shore up its finances, under the guise of protecting the assets from the global crisis. President Cristina Fernández de Kirchner is reportedly unable to take her presidential jet overseas for fear that it will be seized by creditors.
The country is a basketcase. Yet investors in distressed debt are now bidding up those defaulted bonds in the hope that the government will soon try to settle its obligations; the bonds have almost doubled from 15 cents on the dollar in June to 28.5 now, according to specialist brokerage Exotix.
That tells you everything you need to know about the global rush back into risky assets. The extra yield investors demand to own emerging-market (EM) government bonds instead of US Treasuries has more than halved this year to 316 basis points, according to JP Morgan. Analysts have even issued buy notes on Venezuela.
Meanwhile, in the equity markets, the MSCI Emerging Markets index traded at 20.6 times earnings last week, the highest level since 2000. And at 22 times forward earnings, the Shanghai Stock Exchange Composite Index is touching pre-Lehman highs.
Of course, this could be evidence that EMs are decoupling from the West. Even mentioning this "threatens ridicule", says Douglas Porter, deputy chief economist at BMO Capital Markets. But there are signs that it is happening.
China's car market has grown bigger than America's a decade ahead of schedule, while EMs made up 45% of world GDP last year from 37% in 2000, says Cristina Panait at investment firm Payden & Rygel. But if they are to reduce their dependence on the West, their middle classes need to start spending. That's not happening.
Consumer spending has held up only in countries that have introduced large stimulus packages, such as China, points out the FT's Lex. Elsewhere, the middle classes have stopped spending.
Long-term fundamentals are still good. The World Bank estimates that EMs will account for 93% of the global middle class by 2030, up from 56% in 2000. But markets are clearly getting carried away and investors should stay clear for now. Investment trusts such as Templeton Emerging Markets and JP Morgan Emerging Market may look attractive, on discounts of 7% and 6.3% respectively. But they will become even more so.
Published in
Investments
| More
articles
by
Jody Clarke
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.