Emerging and Submerging

From 1996 to 2000, with the honourable exception of 1999, the asset class of Emerging Market Equities was one of the worst performers, competing only with Gold, Commodities and Japanese equities for the title of ‘Dog of the Year’. Yet less than a decade later that same asset class has been continually fêted as the sure fire success for all investors. The emerging economies have been, and certainly will be, most
important to the global economy but that does not mean that they develop in a straight and rising trajectory. In fact their development is likely to be extremely erratic.

Over more recent years the marketing hype has gathered pace and the acronym of BRIC has become common parlance amongst investors of all sizes. These initials, as many will know, refer to Brazil, Russia, India and China as the largest of the emerging market economies. This acronym has been applied liberally to a wide range of investment structures to such an extent that many seem not to look behind the title, but take it as a given that such investments are an assured success. When blind investment greed and
stupidity take over it is usually time to sell.

I mentioned a few weeks ago the malaise of the Vietnamese market and its economy and it has been a good illustration for what has been occurring since then. In fact it would seem that this has reached such a stage that investors are leaving the sector to return to the hardly calm area of US shares. The fear has been the issue of inflation and with that the effect of rising interest rates which may well dampen local domestic demand and leave the economies looking more stagnant. With the falling Dollar putting more inflationary pressure particularly on those countries who peg their currency to it, investors have turned to see the weaker US currency as an opportunity to buy US stocks and shares cheaply.

In Asia, many companies have been generally seen as in relatively fine fettle, however the growing pressure of commodity costs will start to take its toll on margins. As the inflationary wave comes through, so the central bankers have been raising rates which impacts on borrowing and funding costs - all adding to the braking effect on these nations’ economies.

The effects are clear to see and last week the fall in the Pakistani market values saw the ransacking of the stock exchanges in Lahore, Islamabad and Karachi. After a seven year rising bull market, new investors there were unused to the fact that stocks do go down as well as up. The effect of a 35% drop since April 21st has been painful, especially to a nation in such political turmoil.

Last week even China’s growth was finally shown to be slowing as weaker exports pulled back growth to a mere 10.1% from 11.9%, which is the slowest since 2005. This is still a superb growth rate and good news for the global economy but tougher for the Chinese authorities revealing some potentially unpleasant issues such as excess capacity - and with that the pressure on jobs and the possibility of further social
unrest.

Is this, then, the end of the emerging market dream? Certainly not, but probably a return to far more realistic valuations and will lead to the opportunity for reinvestment into these key areas in due course. Let the inflation wave with all its consequent effects pass through and then the opportunities will resurface. But not yet.

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Not all banks are the same - thank heaven. Despite their herd‐like mentality, some, either by luck, good judgement or even effective regulation, have not been covered in the subprime blancmange splattered over so many last year. Wells Fargo produced what seemed to be wonderfully clean and encouraging figures and Santander have been able to bid for Alliance and Leicester as they too, courtesy of the Spanish authorities, have remained unsullied. The others still are having to clean their stables, with the Merrill
Lynch write-off figure now topping $40 billion. In the UK the underwriters are going to have to try and absorb the wash of unwanted stock from HBOS and in due course the unappealing Bradford and Bingley offer - I noted that this organisation rented the Sheffield Arena with a capacity of 12,000 people for its EGM. Always good to be prepared in case of a rush - actually 56 people turned up, plus 22 security guards. The Executive Chairman, Mr Kent, when commenting on the events running up to the meeting, said “A
shambles is unfair because that implies incompetence”. Yup, spot on.

And finally.......there is something about Yorkshire binmen. After having had their trucks fitted with Satnavs in case they get lost (bless), letters have been sent to residents of Craven in North Yorkshire asking them to partially empty their bins as the binmen don’t want to run the risk of straining their backs. There is another answer - find another job.

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P.S. It was good to see Sooty celebrating his 60th birthday this week. I suspect he will be the one person I know who will be celebrating the bear market.

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Have a good weekend,

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited

For previous editions of our Weekly Update, please click here

This article represents a personal and light-hearted view from Director, Justin Urquhart Stewart of Seven Investment Management Limited, and is based on current financial news and events around the world. Its content should not be used for investment purposes and you should contact an independent financial adviser before making any investment or financial decision. Seven Investment Management Limited is authorised and regulated by the Financial Services Authority. Member of the London Stock Exchange. Head office: 23 Austin Friars, London EC2N 2QP. Telephone 020 7760 8777. Registered in England and Wales number 4092911. Registered office: 3 More London Riverside, London SE1 2AQ.