Emerging Markets outlook for 2007 - India, China, Russia, Eastern Europe and Brazil

By: Nadeem_Walayat

Emerging markets have by and large boomed during 2007. With indices such as India's Sensex up more than 50% on the year, though the year ends on a cautionary note ,given the recent actions by Thailand's regime that sent their stock market reeling. So even though the long-term fundamentals are still strong for India, China, Russia, Brazil etc, the first half of 2007 could become a corrective period for the emerging markets, as they end the year on high valuations and growth expectations. Many investors have only recently started to enter these markets, and they may be disappointed by performances during the first half of 2007. The key here is to invest for the long-term growth so well beyond 2007.

India
India has enjoyed a volatile boom during 2007, taking the Sensex index up over 50% by year end, after recovering from a major sell off in May. Though, my last article pointed out, that despite a solid long-term growth story, India may be in for some consolidation over much of the coming year. The growth in India has not been followed by significant investment in infrastructure, especially with regards transport and power which badly lags behind the developments in China. And the mistake many people are making is to term India as another China, which it is not.

The implications of weak infrastructure development are expected to come to the fore of investors during 2007. So it may be worth waiting for a pull back before entering into India. As the risks of some sort of crash (albeit temporary) are much greater for India than for China, where the growth seems more robust. The fact is that the governance of the country and economy is far better managed by communist China than democratic India, despite media coverage of the 'British system', unfortunately this is also accompanied by rampant corruption in India. In summary, India will continue to grow, but also will likely experience more volatility in the stock markets than China during 2007.

China
China continues to enjoy strong GDP growth of 10% per annum, the construction boom also continues as tens of millions flock to new cities every year. This economic prosperity is leading to an ever growing middle class, that is increasingly adopting western style consumer appetites. So even if export demand slackens from a slowing US, this looks set to be made up by increasing demand generated in the domestic economy. Hence the gains during 2006 look set to continue during 2007 and for many years beyond, despite the occasional correction See full prospects for China in Emerging Markets - Chinese Red-chips Soar into Orbit, is Gold Next ? .

Russia
2007 has seen Russia increasingly take control of its abundant natural resources. The forgotten super power is experiencing growth in excess of 6% as the resource dollars and euros flow into Russia by the hundred billion each year. Economically, Russia's domestic economy is expected to grow by more than 6% during 2007 against GDP growth of 7% in 2006. The sectors that are expected to outperform are retail / consumer and property. Russia's economy is expected to continue accelerating as has ample reserves to invest from the the large annual trade surpluses. A small part of the reserves have been used to clear Russia's foreign debt i.e. some $24 billions during 2007. These reserves will also cushion economic activity against any sharp drop in the price of energy and raw material prices during 2007

The stock market is likely to continue to perform strongly during 2007 as long as resource prices don't collapse. Reforms in the electricity sector are set to fuel a continuation of the bullish trend into 2008.

Brazil
Brazil is another resource story, with more than 40% of all exports dependant on commodity prices. Given that soft commodities have started to perk up (coffee etc), Brazil stocks are expected to outperform India and Russia during 2008 despite lower economic growth of about 3.5%, though with interest rates on a continuing downward trend (13.25%), growth could surprise to the upside. The risks are political as 2007 is an election year.

Eastern Europe
The new EU member states continue to enjoy robust economic growth of an average of 6%, as EU membership brings influx of EU infrastructure building funds, and inward investment as western industry continues relocate eastward to lower cost base areas. Countries such as Czech republic, Poland, the baltic states should continue to do well, with growth expectations of 6%. The only exception is likely to be Hungary. The best investment strategy would be a fund that encapsulates the new member states and candidate countries such as Romania, Bulgaria and even Russia.

Gulf States
Unlike other emerging markets, the stock market bubble popped early during 2006 in these markets as valuations reached an unrealistic 50X earnings. Many of the Gulf indices are now down by more than 50%. This has made the valuations more reasonable, but many regional investors have been burned by the decline and a lot of stock is waiting in the wings to be liquidated on rallies. This suggests weakness is set to continue into 2007, even if oil prices rose. Basically the markets need to be given time to build a bottom, so the Gulf region looks like an area to avoid for much of 2007.

Comparative ranking of the emerging markets - In order of most favorable for stock market gains during 2007

1. China
2. Eastern Europe
3. Russia
4. India
5. Brazil

How to invest in emerging markets ?
Rather in direct investments in a handful of stocks quoted on the emerging market stock exchanges, the safest route is via managed funds such as unit trusts, mutual funds and investment trusts that pool the risk. Another alternative is the growing number of Exchange Traded Funds, which attempt to track country indices. Trustnet.com is a good source for investment & unit trusts information. Emerging Market funds will also be mentioned in our stock picks for 2007 article to follow by the end of 2006.

by Nadeem Walayat

Disclaimer - This Analysis / Forecast is provided for general information purposes only and not a solicitation or recommendation to enter into any market position, and you are reminded to seek independent professional advice before entering into any investments or trading positions.

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