Political Risk Latin America Blog @PolRiskLatam

11 for 2011: Are investors too bullish on emerging markets?

Posted in News and Articles, Political Risk by politicalrisklatam on December 28, 2010

by Financial Times – Beyond Brics, December 27th, 2010.

This post by John-Paul Smith of Deutsche Bank is the first of 11 that beyondbrics will publish in the next two weeks addressing the big questions about emerging markets in 2011.

We are pretty optimistic that emerging market equity returns will be positive over 2011, but we expect them to underperform developed market equities. The attractions of global equity markets next year are underpinned by a relatively high risk premium against fixed income instruments and by the improving prospects for the US economy, driven by QE2 and by the ongoing improvements in productivity.

Look specifically at emerging markets and they are also cheap against fixed income, but they are valued at close to parity with their developed market peers, having traded at a discount for much of the previous decade. We feel that they should trade at a discount again, for three reasons.

First, whilst corporate governance has improved over recent years, minority shareholders still lack any real influence in most emerging markets, albeit with some exceptions such as South Africa.

Second, emerging market corporates in aggregate have high levels of operational gearing towards nominal GDP and commodity prices, neither of which are likely to grow over the next few years at the same pace as during 2002-07.

Finally, there is evidence of growing state involvement in both the economy and corporate sector across many emerging markets. This could hurt investors in a number of ways, most notably by governments forcing companies to prioritise social or geopolitical objectives over economic returns. (continue reading… )


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