Donna Block: SHARE WORLD
When the parties stop and the champagne haze wears off, 1998 will be a year that many of us would love to forget – at least from a financial point of view. Anything that could go wrong did. The mighty Asian tigers transformed into pussycats. The Russian bear got stuffed. Japan’s economy committed ritual suicide.
So bring on 1999. But what will the end of the millennium bring to emerging markets? The answer I am sad to say is probably more instability and the roller coaster ride that comes along with it.
Nonetheless, for those of you who haven’t noticed, there are some encouraging things going on in the emerging markets. First, the International Monetary Fund has thrown Brazil’s sinking economy a life preserver in the form of a $40-billion rescue package. And, parts of Asia are starting to show that there might be economic life after death after all. Hot money is once again, albeit slowly, finding its way back into the economies shunned by investors a few months ago.
It’s still early days and the end of the global financial turmoil is not yet in sight. But, after months of darkness, there seems to be a few shafts of light at the end of the tunnel. Less money is exiting the emerging markets that have sound economic fundamentals. Emerging market countries are finally not all being lumped into one group. The prospects for financial stability in Latin America and Eastern Europe are now far less tied to Russia’s problems. And in Asia, Thailand, South Korea and the Philippines are being assessed on their own merits.
But, as one United States analyst notes, even though there are signs of hope, there is no real evidence that emerging markets have seen the worst of their problems. “The optimism we’re seeing is well placed, but it would be a real stretch to come to the conclusion that all is well from here,” he said.
Risk is going to continue to be a big factor in placing bets in emerging markets. The biggest of these is Brazil and its ability to institute reforms, Japan’s success in fixing its financial sector, and the continued support of international authorities to stem a worldwide crisis. The big ifs in 1999 are going to be China and the continuation of growth in the US. If indeed the emerging markets crisis is not contained and the contagion spreads to China all bets would be off and the markets would be once again “untouchable”. Furthermore, growth in the US has to be maintained to keep them buying all those goods from Asia and other exporting economies.
Notwithstanding, for those who have the itch to twitch and the wherewithal to invest, the best returns next year will most likely be found in emerging market bond funds. One reason to consider bonds of developing economies is that investors and fund managers will be scrutinising the emerging economies as never before. Bond markets often benefit from the measures policy-makers put in place to get their economies off the ground. The economies with more stable growth, lower inflation and less currency volatility should have profitable bonds in the future.
But, before even considering taking the plunge, investors have to take a long hard look at why they want to participate in emerging markets. They also have to educate themselves and look at the fundamentals of the country before jumping on to the bandwagon or risk getting burned. For investors willing to get smart, there are enormous opportunities. But you also have to ride out the storm, just as in any other market.