News Column

Growth in Developed Markets Impacts Emerging Economies

Nov. 2, 2012

Lisa Pallavi Barbora, Mint, New Delhi

Joel Bloomer, head of Morningstar's Asia-Pacific equity and credit research, says that as part of their equity research process, Morningstar relies on bottom-up stock picking strategy and has not restricted itself to any particular industry or geography. Morningstar, which researches around 2,000 companies globally, identifies high quality companies regardless of economic cycles. Bloomer talks about equities globally and how economies are inter-linked.

How is the global investor sentiment playing out at present?

The sentiment right now is fairly positive. There has been a lot of news flow in different areas; China is weakening and Europe has been in a constant mess, so investors have a lot to contend with. But overall there is a fairly positive balance as equity markets have done well. There are still risks, the European recession, a pullback in the US and structural changes in China are all still on board. So I don't think you should take strong performance as a given.

Global commodities and consumer goods sectors have been in focus in the last year.

Commodities are going out of favour. Some global companies have sold off quite a bit and that's linked to the uncertainty in China. Even though they are out of favour, it plays into our investment strategy as we are willing to take some contrarian risks. There are some economic risks like China and Europe slowing, but that's already priced in.

Consumer defensives have done well in most markets because in the recent risky environment, investors preferred them. Also they tend to offer good dividend yield and in countries where interest rates are very low, people really want to get that dividend income. Although its market specific, overall there is probably not a lot of upside left in these stocks.

How can South Asian economies be affected by what's happening in Europe and US?

Exports from this region to Europe are a high percentage of GDP (gross domestic product) growth for these countries. If Europe were to slow down further, you would see a slowdown in countries like India and China; in fact, part of that is already happening.

Another impact is that fund flows to emerging markets come from developed countries. So the 'risk on/risk off' trade gets affected. Debt financing in emerging market often comes from overseas investors in search for yield as developed countries have very low interest rates. While that in itself is okay, the problem arises when emerging economies become too dependent on such flows and it suddenly goes away.

These factors can hit what appears to be fairly stable growth (in emerging economies).

How does India fit in as an investment destination for equity investors overseas? Is it more about allocating funds or are investors also keen on specific Indian firms?

The economic growth and interest rates here are attractive in isolation, but there are other issues like the fiscal deficit which don't favour it. Also the credit rating downgrades make it a less attractive destination. In my conversations with people here, it's more about whether money is flowing in or out. Whereas in other places, it's more about which companies are doing well and which aren't. Over here the fund flows sort of override the fundamentals of companies.

Distributed by MCT Information Services

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Source: (c) 2012 the Mint (New Delhi)

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