Emerging Markets Get More Diversified

At the end of Feb. Chinese A share markets slumped as markets panicked on rumors that Chinese government planned to impose a 20 percent capital gain tax on stocks as well as profit-taking.....

Jessy Yang 30.03.2007
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At the end of Feb. Chinese A share markets slumped as markets panicked on rumors that Chinese government planned to impose a 20 percent capital gain tax on stocks as well as profit-taking by investors on heightened concerns about high valuations. In the meantime, the latest U.S. economic data was weak and housing market showed further sign of slowing. The U.S. subprime mortgage meltdown was intensified and the former Fed chairman Greenspan warned of likely recession by year end. These factors, coupled with investors unwinding their Yen carry trade positions as the dollar fell against Yen, sent global markets down dramatically on Feb. 27th and 28th. Emerging markets were hit harder. The MSCI Emerging Market I

ndex fell consecutively for five trading days from Feb. 27th to March 5th, down 10.2 percent and markets saw large-scale outflows as a consequence.

According to the EPFR, emerging equity portfolios have seen outflows for four weeks in a row as of March 21st. For the trailing one week as of March 21st the outflow reached around $668 million USD, making the year-to-day total outflow $3.7 billion USD. Almost all major emerging markets portfolios suffered except Latin America, which saw an inflow of 460 million USD. The general emerging markets portfolios had the highest outflow of $392 million USD. The emerging Asia equity funds saw an outflow of $171 million and the outflows from emerging Europe, Middle East and African equity funds were $151 million. Investors clearly showed their concerns on the sustainability of fast growing emerging economies.

In February Morningstar Europe conducted a survey on European fund managers' perspective on emerging market valuations and risk levels. The results showed that recent emerging market corrections were related to concerns on high valuations, increased investors' risk aversion and profit-taking activities. 53 percent of respondents chose India as the most overvalued market while 33 percent selected China. On the other hand, respondents voiced the most concern with Russia and Emerging Europe as 50 percent of managers thought Russia economic growth would be weakening and around 65 percent thought emerging Europe would deliver the worst equity returns over the next three years compared to Latin America and emerging Asia.

It is worth noting that although this survey was conducted before the corrections, around 46 percent of respondents thought there was still room for moderate price increase for emerging equity markets. Despite that there was a large scale of outflows from emerging markets due to the corrections, the fundamental of emerging markets remains positive and the long-term growth prospect is still very encouraging. In fact, many emerging markets have already been recovering from previous loss. As of March 23rd, the monthly return of MSCI BRIC Index was 3.59 percent, offsetting its 2.25 percent loss in February. India gained 4.18 for the month as of 23rd, roughly half of previous loss of 8.66 percent in February.

Emerging markets are growing more diversified. In addition to China, India and South Korea, ASEAN countries are attracting more interest in Asia. The GDP growth rate of Malaysia, the third largest economy in Southeast Asia, was 5.9 percent last year. Its total trade surplus last year exceeded 1,000 bns Malaysian Ringgit, pushing Ringgit higher against the USD. Last week, Malaysian government announced to scrap capital gains tax on property deals from April 1st and establish a special economic zone in the South to relax the restrictions on foreign ownership. In the meantime, the governor of Malaysian Central Bank spoke publicly to support a stronger Ringgit. Healthy economy as well as supportive policies has boosted Malaysian stock market to be one of the best performing markets in Asia this year. The MSCI Malaysia Index gained 4.94 percent for the month as of March 23rd and its YTD return was 16.3 percent.

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Jessy Yang  Jessy Yang is a research director with Morningstar Asia.

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