Cushla Sherlock: Why should investors consider emerging markets?
Sakthi Siva: There are two reasons for investors to consider emerging markets. First, because of the longer-term structural forces. That includes good demographics, young populations, good return on equity, strong corporate balance sheets, good sovereign balance sheets, and improving trends in all of those. Second, there's also the shorter-term factors. This year in particular, emerging markets have been a bit laggard. But, because of special factors, that could reverse quite soon.
Why have emerging markets under-performed so far this year?
For three reasons. First, in the fourth quarter of last year, emerging markets had a very strong run, so we think this year's underperformance is partly a payback for that. Second, higher than expected inflation has picked up in some emerging markets, and probably earlier than we expected. That's also a bit of a constraint. And third, for markets like Korea, which has played on global growth and the US recovery, investors are playing that through Japan, rather than through Korea.
Korea obviously has good growth potential. Which other emerging markets have good prospects?
The other market that we are excited about is India. India recently joined what we call the "cheapest 4 club". And India normally is seen as a more expensive market. It's not often a market that looks cheap in our valuations. Historically, when India joins the "cheapest 4", it has outperformed.
Are there any major threats to the development of these economies?
The main challenge this year, and one of the reasons why emerging markets have lagged, is inflation. Inflation is picking up earlier and faster than we expected. We hope this is temporary, but if it is more permanent, that could be a major challenge for emerging markets, particularly this year.
from Credit Suisse
Sakthi Siva: There are two reasons for investors to consider emerging markets. First, because of the longer-term structural forces. That includes good demographics, young populations, good return on equity, strong corporate balance sheets, good sovereign balance sheets, and improving trends in all of those. Second, there's also the shorter-term factors. This year in particular, emerging markets have been a bit laggard. But, because of special factors, that could reverse quite soon.
Why have emerging markets under-performed so far this year?
For three reasons. First, in the fourth quarter of last year, emerging markets had a very strong run, so we think this year's underperformance is partly a payback for that. Second, higher than expected inflation has picked up in some emerging markets, and probably earlier than we expected. That's also a bit of a constraint. And third, for markets like Korea, which has played on global growth and the US recovery, investors are playing that through Japan, rather than through Korea.
Korea obviously has good growth potential. Which other emerging markets have good prospects?
The other market that we are excited about is India. India recently joined what we call the "cheapest 4 club". And India normally is seen as a more expensive market. It's not often a market that looks cheap in our valuations. Historically, when India joins the "cheapest 4", it has outperformed.
Are there any major threats to the development of these economies?
The main challenge this year, and one of the reasons why emerging markets have lagged, is inflation. Inflation is picking up earlier and faster than we expected. We hope this is temporary, but if it is more permanent, that could be a major challenge for emerging markets, particularly this year.
from Credit Suisse
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