Investing In Emerging Markets

Sunday, October 01, 2006

Emerging stock markets rebounded in the third quarter from their steepest drop since 2002 as investors anticipated that domestic economic growth would fuel demand for consumer goods.

Standouts in the quarter, including China Mobile and Wal-Mart de México, may extend their gains because incomes are rising at a faster pace in developing countries than in the United States.

"We're in a sweet spot, as far as I'm concerned," said Mark Mobius, who manages emerging market equities at Templeton Asset Management in Singapore. "Economic growth in these countries is very good."

The Morgan Stanley Capital International Emerging Market index, a dollar-denominated measure of 25 countries in Asia, Latin America, Eastern Europe, the Middle East and Africa, added 3.8 percent this quarter. It was the index's eighth advance in nine quarters.

During the second quarter, the emerging-market index fell 5.1 percent. The decline resulted from a 25 percent plunge from May 9 through June 13, the biggest for any time period since October 2002.

Funds investing in emerging- market stocks had net outflows of $1.6 billion this quarter, according to Brad Durham, a managing director at Emerging Portfolio Fund Research, which tracks 15,000 funds with a combined $7 trillion in assets. U.S. equity funds suffered outflows of $6.8 billion, Durham said.

The U.S. expansion will slow as a cooling housing market curbs consumer spending in the world's largest economy, the International Monetary Fund said this month. Prices of existing homes in the United States fell last month for the first time in 11 years and sales slipped to their lowest level since early 2004, according to the National Association of Realtors.

On Sept. 14, the IMF cut its 2007 growth forecast for the U.S. economy to 2.9 percent from 3.3 percent, the weakest since 2003.

The Chinese economy will expand 10 percent in 2006, its fourth straight year of double-digit growth, according to the IMF. The Fund raised its forecast for India to 8.3 percent this year, from a 7.3 percent estimate in April. The Indian economy grew 8.5 percent in 2005.

"The view that we will see a slowdown in the U.S. economy seems to be increasing," said Parameswara Krishnan, a fund manager at DNB Nor Asset Management in Chennai, India. "If we see that happening, countries that have a buoyant, domestic-driven economy may actually be safer bets."

China Mobile gained 24 percent this quarter, while Wal-Mart de México rose 20 percent.

Asia outside of Japan, MSCI's largest emerging-market region, climbed 4.8 percent this quarter. Demand from China and India, and the resurgence of growth in Japan helped support profits and share prices in Asia.

An MSCI index that tracks Eastern Europe, the Middle East and Africa climbed 0.7 percent, while a Latin American index added 3.2 percent. Egypt's CASE 30 index surged 35 percent, the world's best performer this quarter. Shares of United Housing & Development, an Egyptian construction company, more than doubled.

Middle Eastern stocks slumped along with other emerging markets in the second quarter as the prospect of higher interest rates around the world prompted investors to shun riskier assets.

Gulf markets added to the slump in the quarter as oil prices fell. Saudi Arabia's Tadawul stock index tumbled 15 percent, the worst performer among 80 indexes ranked by Bloomberg. It plunged 23 percent in the second quarter. Saudi Basic Industries, the largest publicly traded company in the Middle East, led the declines, slumping 26 percent in the latest quarter.

In Russia, stocks advanced for a seventh straight quarter. RBC Information Systems, a Russian media company, was among the top performers, jumping 43 percent in the quarter. A drop in oil prices limited gains. Shares of Gazprom, Russia's natural gas monopoly, added 1.9 percent this quarter after a 24 percent rally in the first half. Lukoil, Russia's largest oil producer, slid 8.7 percent this quarter.

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