The Hindu Business Line : Market View

Despite short-term corrections in price of crude oil, it is widely accepted that oil prices would remain higher than long-term averages through 2006-07. The impact on economies could vary, developing economies being impacted more than the OECD countries. There are two reasons why this is so. First, the demand growth in 2007 over 2006, is projected at 2.03 per cent for the world, but skewed with OECD demand growth at 1.04 per cent and non-OECD demand growth at 3.41 per cent. China's demand for oil is projected to be 6.68 per cent, highest among all consuming countries. Second, the oil intensity of OECD economies has dropped while countries like China and India continue to have a high dependency on oil for their growth targets. This leads to more adverse effects on these economies from secular increases in price of oil, compared to the OECD economies.

OptiMix View and Outlook

In recent months, there has been a renewed policy thrust on the SEZ initiative, with a slew of mid-sized domestic companies lining up for investments in the proposed SEZs which offer significant tax incentives. In our view, the availability of land at reasonable cost, size and scale economies of the projects and the development of accompanying infrastructure will play a crucial role in attracting serious investments of a long term nature into the manufacturing sector. Therefore, the progress of the first few large projects may be keenly watched, before sizeable new investments are made.

Franklin Templeton Investments

With their (emerging markets) economic importance increasing, one would expect the fixed income markets to move at least roughly in line with economic activity. That is, increased economic activity should go hand in hand with a broadening and deepening of fixed income markets, and investments in these countries would be expected to be an important component of any global fixed income allocation. But, at present, these countries are significantly under-represented in relation to their economic importance. Amazingly, 96 per cent of investments are concentrated in countries that make up only 52 per cent of world GDP.

The EM asset class is undergoing an important structural change, namely an expansion of corporate financing and a migration from external to domestic financing. At present, these markets are still in the early phase of their development, and periodic volatility and sharp corrections can be expected. But over the long run, it is very likely that investors will want to shift more of their allocations away from the shrinking G-3 economies and towards many EM countries and companies.

PIMCO Emerging Markets Watch, June 2006

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