Current Commentary
Bottom Line: Emerging markets in 2003
By Gregory Fossedal, Special to UPI
WASHINGTON (UPI) -- Investors and politicians and journalists, who have more in common than they know, share a hesitation about answering "hypothetical questions" and "don't like to make predictions," especially "about the future." Still, most opportunities in life are annoyingly hypothetical, and lie in the future, which to paraphrase a sportscaster is the main thing we have ahead of us. In short, it's time, after a brief review of predictions past in this space, for a look at 2003 in emerging markets.
Reviewing the results of this feature in 2002, we find the usual mixed bag of some good calls and some bad, but happily, so far, with a nice bias to the up side. In its maiden voyage in October, the "bottom line" gave two thumbs up to Brazil, about to elect a president with a long history of toying with ideas like tax hikes, industry nationalization, devaluation, and debt default. A review of his campaign and information about his plans after a likely victory suggested that Ignacio Lula da Silva was a responsible and growth oriented leader who, in the manner of Bill Clinton in the United States in 1993, would have a close eye on the bond and even equity markets.
Lula has done that, producing a surge in confidence that has driven Brazilian equities up more than 20 percent from their lows, which they hit just about the time of our election call.
Likewise, our case for shorting China, at the time of the Chinese politburo restructuring, has produced solid gains of better than 10 percent from the call, with a decline of better than 25 percent on China Mobile, one of the positions we liked, and hence a substantial gain for short sellers. A good short is especially valuable to investors, because, as we have all learned painfully in recent years, individual stocks and overall markets do not always go up. We're still riding that position through the first quarter, but ready to take profits and cover as energy prices peak and the last bit of 1990s excess is wrung out of U.S. equity markets.
Bad calls? So far Turkey has been the worst, stocks there declining better than 15 percent since our November item touting it. Turkey's still a good bet over the long haul, but may well suffer significant instability during a U.S. war with Iraq, due both to the economic fallout and the fact that Turkey will feel bound to do something to support the American war effort, something that is not popular with its largely Moslem population. We're still in and buying more on the dips.
Regarding the possibility of Democratic gains in the House elections, which we put at 30 percent or better, we were flat wrong, though interestingly, the investment strategy based on shorting the United States we drew from that is so far slightly in the plus position. That's because, as the item emphasized, the possibility of a Republican decline was only one of four or five factors likely to drive the U.S. market down, the others being war, oil, a weak U.S. economy, and the uncertainty (which still prevails) about the direction of the Bush administration's economic team on issues such as Latin debt and U.S. protectionism over steel, agriculture and other products.
A week later, after what turned out to the GOP sweep, we talked about the investment implications for such countries as Chile and Singapore, a combined position that's up better than 10 percent from that early November article. We also speculated that with the change in Congress, Bush was likely to act soon on a general intention to shake up his economic team.
Overall, it looks as though we batted about 65 percent on political predictions, and that a portfolio based on them would have gained, conservatively, better than 5 percent in the fourth quarter. That's about how a fund based on the type of thinking you see in this space, the Democratic Century Fund, performed over that same period. Thus, the "bottom line" can answer as the investor who jumped out the window did when the people on each floor asked how it was going: "So far so good."
In 2003, we like Latin markets especially to rebound, starting in January, when the will suffer less from Middle East political and oil price volatility, and gain most directly from the fact that a Treasury secretary aggressively unconcerned about Latin collapse has been replaced by one who, at worst, appears less sanguine about it.
There may be a speed bump in the second or third quarter, as secretary John Snow and others come to grips with Argentine and Brazilian debt, unrest along the U.S. border with Mexico, and the mess in Venezuela.
All these negatives, however, are a corresponding opportunity if Snow and his new team pay more than passing attention to the world economy in 2003. This is likely as the Bush foreign policy moves from war to reconstruction, and from saying nice things about trade to doing things that will help it grow.
Asia should perform well too, but with a different chronology. Korea, Taiwan, and other energy importers may face a rough first quarter, and, as well, are likely to suffer from the weak fourth quarter of 2002 in the United States, which buys a lot of the electronic and other equipment from those countries. By the second half, and into 2004, as U.S. businesses and consumers begin to replace computers and other equipment stocks that are now showing signs of aging, the Asian and U.S. tech recovery should turn into a real rally. Markets, of course, relentlessly seek to anticipate such events, and so may be moving up even sooner.
A number of eastern European economies have finally gained entrance into the European Union, but as Germany and France sag into the malaise of high tax rates and huge transfer payment problems, they may wonder whether it is such a boon after all. A future "bottom line" will examine some of the particular countries we like and don't, but as a regional matter, we expect them to trail Asia and the Americas. There may be some short opportunities (can Poland and the Ukraine go down further? Will Russia's budget survive the collapse of oil prices in spring?) but these are questions, not answers.
As is suggested above, the fate of many of these markets will be strongly linked with events in the United States. Not only is the United States a leading customer but our affluent society is a major provider of capital to developing country stock and bond markets. Emerging markets tend to move up and down a little bit more than the United States, which is to say, a good year for America is a great year for them and the recent bad years have been even worse for many others.
Accordingly, the likelihood of a U.S. recovery in the 4- to 5-percent range in 2003, and perhaps 5 to 6 percent in 2004, is of no small interest to emerging market countries. It's a reason why they should, if anything, be overweighted by investors for the coming year and perhaps the 5 to 10 years that follow.
Some of these trends, of course, will be amended, strengthened, or reversed as the calendar pushes on toward 2004, which is another reason why it is good to keep checking in with this space, and your own investment advisor, before taking any actual positions in the market. Anticipating events and analyzing hypotheticals isn't easy and it isn't always right. It is, however, the only way to make money, which is something the bottom line certainly wishes on everyone, now and in the future.