/ 5 August 2008

Why 10 bourses have bucked the global downturn

The financial quake of the past year has toppled almost all the world’s stock markets.

In the 12 months to the end of July, only 10 bourses stayed in positive territory, all of them in emerging markets. Half were in the Middle East, two in North Africa, plus Bangladesh, Slovakia and the Bovespa in São Paolo — none of them, with the exception of Bovespa, in red-hot economies.

”Most of these markets are somewhat obscure,” said Nick Parsons at NAB Capital. ”I think that is a fair characterisation rather than a slur.”

The FTSE 100 declined by 16,5% over the past year but was still a better performer than the other main European indices. The main reason is that London is home to eight mining and commodity companies at a time when natural-resources prices have been soaring.

According to numbers crunched by Merrill Lynch, 70% of profits in the FTSE 100 this year will be made by resources companies. ”If you buy the FTSE, you are not buying the UK economy,” said chief investment officer Gary Dugan. ”It is now very heavily weighted toward resource stocks.”

The stock markets in the big emerging markets of India and China have both fallen back as foreign investors have fled — Shanghai has dropped 35,1% over the past year. ”It is a truism that emerging markets hold up until they don’t,” said Parsons. ”They are largely about momentum and as long as they are going up they are doing well. But when they fall, they fall the furthest.”

The most robust of the Bric economies (Brazil, Russia, India and China) has been Brazil. The Bovespa index is 5% up on a year ago, though it too has been falling pretty sharply in recent weeks, losing 20% of its value since the beginning of May.

The strong performance of the Middle Eastern markets can chiefly be explained by high oil and gas prices, though some have also opened up further to foreign investors over the past 12 months.

Parsons says the relative obscurity of the 10 outperforming markets has played to their advantage. ”The ones that became hot spots then collapsed. Vietnam doubled and halved. Shanghai tripled and then halved again. The stock markets that didn’t attract large amounts of foreign investors in the past weren’t subject to the same excess or capital flight.”

Ian Harnett, co-managing director at Absolute Strategy Research, notes that the markets that have held up are all relatively small and illiquid, which means they could be more sensitive to inflows and outflows of capital. ”Our view is that oil prices are likely to fall and they could be in for a rocky ride.”

The Irish exchange has dropped by 46,1% as the Celtic tiger appears to have lost its roar. At the bottom of the list, though, is the Iceland all-share, which has lost 52,3% of its value.

Iceland’s economy expanded rapidly on the back of high borrowing rates and is now facing potential difficulties refinancing its debts. It has been likened to the canary in the coal mine, an early warning signal for the global economy. Investors will be hoping that the comparison is unwarranted. — guardian.co.uk