Out with the old, in with the new?

In his roundup of the year ahead,
Richard Urwin, BlackRock’s head of asset allocation and economics
highlights the strong recovery already seen in some emerging markets in
2009.

“The global economy began to bottom out in the spring of
2009, and during the second half of the year, clear evidence of global
recovery emerged,” says Urwin. “While the pace of recovery was fairly
subdued by historic standards in the developed economies, in some
emerging markets the pace of recovery was very rapid.”

At the
same time, emerging market specialists such as Ashmore and Silk Invest
lay out a compelling investment case for newer markets. In a commentary
entitled ‘Why emerging equities?’, Jerome Booth, head of research at
Ashmore, reminds us that “Emerging markets represent the bulk of
humanity and industrial production, and around 50% of global GDP using
purchasing power parity.”

He goes on to highlight the reasons
why emerging-market equities should trade at a premium to developed
equities. First, high and reasonably static levels of savings will be
channelled away from financing leverage and consumption in developed
countries into domestic investment. This will create an investment boom
that will result in growing liquidity and size in both traded and
pre-IPO emerging-market stocks – the largest IPOs are now regularly in
the emerging markets not the developed world, says Booth.

But
the most important point, in Booth’s view, is that, relative to
developed markets, emerging companies are in environments without big
credit constraints. “In this environment, they will be taking market
share from developed competitors over the coming years, starting with
banks, as is already becoming apparent,” he predicts.

Meanwhile,
Silk Invest, a specialist in the Middle East and Africa, highlights
similar issues to make the case for new-market debt.

“Many of
these countries have low levels of debt outstanding and hard assets
(resources) as collateral,” writes the Silk Invest team. “Local
currencies have been underperforming during the recent US$ decline and
we believe that the time has now come for fundamentals to trigger an
upward revaluation. Bear in mind that many countries have only started
to roll out their debt program for a variety of reasons, many which are
constructive.”

Silk Invest puts forward the view that “the world
is increasingly going to realize that the US Dollar is now less linked
to the fundamentals of the US economy and is increasingly regarded as
the currency of this world, more specifically, that of the new world”.

Silk
Invest’s prediction for 2010? The elements are aligning in favour of
the new world. Of course, they would say that, wouldn’t they – and, as
always, time will tell.

Fiona Rintoul, Editorial Director
©2010 Funds Europe