Emerging markets, especially those in Asia, will continue to be “hot” among global investors in 2007 but they should also consider the risks involved, say equity researchers.
A Bloomberg report said on Tuesday that emerging market stocks may lead global equity returns for a sixth successive year as consumers from China to Brazil were becoming sufficiently rich to support economic growth even as exports slowed.
Markus Rosgen: Global economic slowdown and commodity prices increases are risks facing Asia
Research analysts, while also optimistic on emerging markets, are advocating prudence and are selective with their picks. Emerging markets are economies with huge growth potential.
Citigroup Investment Research head of regional strategy Markus Rosgen told StarBiz from Hong Kong that prospects for Asia continued to be good as fund flows were strong.
“That said, global strategists are more bullish on Latin America's emerging markets compared with Asia, because they have stronger earnings growth and are main exporters of commodities, which recorded strong prices in 2006. Their return on equity is higher too,” Rosgen said.
He said global economic slowdown and commodity price increases were risks that Asia faced because it was a net importer of raw materials.
“We are overweight on Hong Kong, Malaysia and Singapore but underweight on Taiwan, Thailand and India. For Taiwan, we think IT (information technology) demand would improve, but only in the second half of 2007,” Rosgen said.
JP Morgan Securities head of broking Clement Chew said the brokerage was positive on Asia. Among emerging economies his picks were Taiwan, Malaysia, China and the Philippines.
“We also like Singapore, but we think Malaysia could offer the second best overall returns in terms of equities and currency trading for 2007 of 10%, behind Taiwan,” he told StarBiz.
Chew said it was difficult to predict external risks that could shake market confidence, adding that the Federal Reserve rates could “spring a surprise” following better-than-expected US economic numbers.
“The US is still a big part of Asian exports, but Asian countries have recently started to diversify and there is more trade between countries in the region now,” he said.
Credit Suisse analysts Stewart Paterson, Daryl Goh and Peggy Chan, in a joint report last month, also had Taiwan as the top pick, citing improving IT demand and efforts to improve economic ties with China.
Mergers and acquisitions as well as an accommodative monetary stance would be positive for Malaysia, while Thailand's status as a food exporter amid rising global food prices also put them in good stead, Credit Suisse said.
However, the analysts believed that fundamental values had disappeared from China's markets and said investors there might worry about losing more on underlying equity than what they could gain from potential yuan appreciation.
With India having the highest price/earnings ratio, Credit Suisse is underweight on India as well, forecasting mediocre medium-term returns from equities.
“Likely higher interest rates would result in widening current account deficit, and consequently a weakening in India's currency. Foreign capital could leave,” the analysts said.
