Emerging Markets: Africa and Middle East on the rise

Estrella Llorente, portfolio manager, Santander Asset Management UK, comments on the prospects for global emerging markets: "Higher inflation, concerns over the credit market and the slowing US economy are still impacting the Emerging markets this year. On the other hand, all the Emerging countries have increasingly diversified their trading partners and depend less on the US, so they should be less impacted by a weaker global economy.

"The valuations in some emerging markets are higher than historically, but reasonable considering earnings upgrades, increased GDP growth, market liberation - along with the greater investment flows from institutional investors and pension funds. The drivers, until now, have been domestic investment, elections, consumption, infrastructure, commodities and international flows.

"The MSCI Emerging Markets index rose by 37.4 per cent in GBP during 2007, outperforming the MSCI World index by 30 percent. In 2008 to date, the MSCI Emerging Markets index has fallen in line with all the global markets. In addition, the disparities between emerging countries and sectors have increased again.

"With this in mind, fund managers have to be increasingly dynamic, taking a holistic view on emerging markets, rather than focussing on just political factors or fundamental analysis. Those seeking to generate new ideas and with an open, global approach to managing their portfolios will probably fare best.

Latin America v Asia

"I have been overweight this year in Latin American markets and cautious in the EMEA and emerging Asian markets.

"Now, after the strong performance of the Latin markets, coupled with the big outflows from the Asian markets (most of all China and Korea) and the new measures of the Chinese government, I expect a return of flows from International investors to the Asian markets. Therefore I have reduced my weighting in Latin markets and increased Asian exposure.

"For many years Asia's economic situation and companies have become increasingly robust. We are now seeing this replicated in Latin countries: Brazil and Chile for example, have increased their GDP Growth in 2007 considerably. But we may now see, as happened in the Asian countries, a slight slowdown in GDP over the next few years.

Chinese commodity demand continues to boost Africa

"China needs commodities from African countries but also from other regions and countries (Latin American countries, Russia, Caucasus, Middle East) to preserve their economic and export growth. For this reason, China has increased and strengthened its relationships and trade with these regions.

"Africa is the third largest region in gas and oil reserves and a global leader in production of other commodities. The oil exports are around 60 per cent of total African exports. Additionally, Africa exports a lot of minerals, diamonds and timber. In 1990, one per cent of African exports were to China and by 2005 this had risen to 13 per cent. In 2005, Africa produced 77 per cent of world Platinum production, 56 per cent of Cobalt, 39 per cent of Manganese, 46 per cent of Diamonds, 31 per cent Palladium, and these percentages look to continue increasing over the next few years*.

"China, as other Asian countries, is increasing all its investments in Africa. But China is helping to develop Africa in many ways too.

*Source: USGS, Brook Hunt, Credit Suisse estimates.

"China has cancelled debt (cancelling all interest-free government loans) to 33 countries and granted preferential loans equivalent in value to The World Bank's loan programme. These preferential loans are mostly devoted to building infrastructure (motorways, trains, ports, airports) to help to export these commodities, but are also dedicated to humanitarian needs (hospitals, schools, universities).

"Africa is a clear beneficiary of the global need for raw materials, but has to put in place a strategy to increasingly diversify and unlock the potential of its economies in the long term.

Emerging Europe growth slows, while Middle East star rises

"The Czech Republic, Hungary and Poland are 3.2 per cent total weight in the MSCI Global Emerging Markets Index and they are Member states of the European Union. Except Poland and Russia, Eastern European countries saw their GDP growth slow in 2007. The consensus estimates are that only Hungary will achieve higher GDP in the next two years.

"Turkey comprises 1.2 per cent of the index and is a candidate to be a Member state of the EU. Israel is 2.2 per cent of the index, Russia 6.7 per cent and South Africa 6.7 per cent. We are looking more at the African continent and Middle East as potential growth areas and to help diversify the global portfolios and our emerging markets exposure. These two regions have low correlation (and some countries even negative correlation) to the Global Markets Indexes."