The Hindu Business Line : Emerging markets `increasingly becoming a mainstream asset class'

Chennai May 19 When the Sensex is comfortably above the 14,000-mark, it may be sobering to remember the volatility that equity markets experienced in 2006. Thankfully, those jolts were transitory; yet, they could "signal more adjustments to come," cautions `World Economic Situation and Prospects 2007', a recent publication of the United Nations, from Academic Foundation (www.academicfoundation.com) .

"The short-lived unsteadiness in equity markets and currencies in May-June took place in the context of tightening monetary conditions in the main currency areas and initially featured a general flight from risk," notes the study.

Equity markets that had seen the largest run-up in prices since 2005 experienced some of the biggest declines. "This was the case in Argentina, Colombia, Hungary, India, Peru, Poland, the Russian Federation and Turkey, among other countries." Russia and Saudi Arabia markets fell by 24 per cent and 50 per cent, respectively, `despite rising oil prices and solid external and fiscal fundamentals'. The Indian bourses saw big falls towards the middle of 2006.

Accompanying the correction in equity prices were `strong exchange-rate adjustments', because `speculative investors, especially hedge funds, quickly retreated from leveraged carry trades in higher yielding emerging market currencies (such as Brazil, Indonesia and Turkey).' What has happened thereafter? Investors have begun to differentiate among emerging markets, finds the UN. "Countries with large current-account deficits financed by bank and portfolio flows are perceived to be the most vulnerable." Which explains `further exchange-rate depreciation' in Turkey, South Africa, and several countries in Central and South-eastern Europe, even as Brazil recovered.

Investors' perceptions

Global factors are more important than local events in determining investors' perceptions of the soundness of the fundamentals in many emerging markets and thus had a larger impact on asset prices, observes the publication.

Outlook for the current year is the likely continuance of `interest in corporate equity placements and emerging market stocks'; still, a reversal is possible `in the wake of a slowdown in the global economy and/or a further contraction in global liquidity'.

Prediction for the year is a deceleration of the world economy `after a solid and broad-based growth for three consecutive years', mainly due to slowdown of the US. Growth in Europe and Japan may not act as `locomotives of global growth'. For the developing countries, though, the outlook is `mostly positive', to be read along with the caveat of `moderation', inevitably tagged on.

"Sustained high growth in China, India and a few other major emerging economies seems to have engendered synergy among developing countries so that growth in this group is more endogenous." However, many developing countries suffer from high vulnerability to `the vicissitudes of commodity prices and the volatility of international financial markets'. On the forex build-up in many developing countries, the report says that the accumulation has `limited overall debt flows'. And on local currency bond markets in emerging economies, the observation is that these are `the fastest growing segment of emerging market debt'.

What if speculative investors were to withdraw, as in 2006? The impact is likely to be mitigated. Reason: improved stability in external financing, as a result of `broadening of the investor base for emerging market securities'.

More Stories on : Stock Markets | Foreign Institutional Investors

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Two negative surprises in Bajaj demerger

`Demergers unlock value for shareholders'

Emerging markets `increasingly becoming a mainstream asset class'

Nitin IPO subscribed 48.48 times