July 22, 2003

A Look at Emerging Financial Markets

The Economist's Buttonwood Tree takes a look at emerging financial markets. The overall lesson I get is one of the extraordinary magnitude of political risk of various types in first-world investors' valuations.

Economist.com: ...Earlier this year, investors had piled into emerging-market bonds for a number of reasons. Low interest rates made people feel as though problems had evaporated. Returns had been good for a couple of years, which sucks in more money. And the market was a good place to search for yield. All of these factors are reversible--and may already be reversing. American long-term interest rates have been rising sharply of late. After the Federal Reserve cut short-term rates by a less-than-expected quarter point in mid-June, investors lost some of their faith in Treasuries but emerging-market bonds suffered more. At one point, their spreads widened by 70 bps. Growing signs of global growth, however anaemic, may herald further woes for emerging-market bonds.

Equities are a different proposition. As any economist will tell you, classifying emerging stockmarkets as an homogenous group is misleading. Russia is different from, say, Argentina, which itself has little in common with South Korea. The same economist will then go on to say with a straight face and no sense of contradiction that the case for investing in emerging markets in the long term (by which he means shares not bonds) is overwhelming because it is these markets that will generate growth in the coming years.

This contradiction is partly reconciled thus: the perennial problem of emerging markets is not one of growth but of whether investors will see any of it. The likes of India and (even more so) China have been the graveyard of shattered dreams. Locals seem to be able to keep any profits going thanks to rigged rules, flimsy corporate governance and crime. Small wonder, then, that the MSCI emerging-market index is still 40% below its peak in 1994, after which crises in East Asia, Mexico and Russia rather dented investors' enthusiasm for all things emerging.

To continue to take such risk, investors need alluring returns. Despite their sharp rally this year, shares in many emerging markets are cheap. According to The International Bank Credit Analyst, emerging-market equities are trading at ten times next year's profits--a 40% discount to their ten-year average, and a 50% discount to the average price-to-earnings ratio worldwide. Almost all emerging markets are at big valuation discounts to their long-term averages...

Posted by DeLong at July 22, 2003 12:47 PM | TrackBack


Speaking of looking at markets --French are justa about to signed deal with India beating out the US contract.

Top Stories
India to sign submarine deal with France

Chennai, July 22. (UNI): India is to shortly sign a deal with France for the purchase of six `Scorpion' submarines for the Navy.

Announcing this to reporters here, French Ambassador M Dominique Girard said negotiations with the Navy was in an advanced stage and an agreement for the acquisition of the advanced submarine would be inked soon.

The submarine is the most advanced among the non-nuclear models designed and built by the French, he added. The deal involved transfer of technology and eventual building of the submarine by the Indians, Girard said.

Negotiations were also on regarding the purchase of Mirage fighter aircraft for the Indian Air Force, he said.

To a question, the diplomat said the French would not, however, sell nuclear submarines to other countries. India, perhaps, would have to build its own nuclear submarines if she wanted to acquire such submarines, he said.

Posted by: Cheryl on July 22, 2003 12:56 PM

I wonder if Enron ever got paid for their Indian power? ;)

Posted by: Stan on July 23, 2003 08:35 AM
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