Emerging Growth Wagon- Don’t just watch! Get Onboard

In china inflation is nearing 5%, and that has shot straight from zero in past one year. Conditions in India are much worse where food inflation is completely out of control, gone as high as 18%.  You can blame it all on cyclical pressures that are keeping inflation rates in developing countries significantly higher than developed countries.

Situation is already at its worst and now we can expect some relief as monetary authorities simply cannot allow inflation to rise above from current levels. This may result in more monetary tightening, so a regime of rate hikes can be expected over the next six months. As a result, emerging market currencies will largely benefit from the forced monetary tightening.

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Strong Macro Environment and Consistent Growth

Current situation may seem a bit dicey to a value investor, but emerging markets stand tall for pure equity investors as such returns are simply impossible in developed markets. India is easily growing over 8% per annum, whereas growth in US is unstable even when it’s growing less than half this rate. Concerns over China’s growth have been making news over past many years, but a matter of fact is that they are still not slowing down. A consistant macro environment along with a sharp bounce back recovery is the reason why investors are now taking growth in emerging equities more seriously.

Liquidity Unstoppable: Chasing Emerging Market Growth

At present liquidity situation is much better than it was amid the recession, and in emerging markets liquidity is simply unstoppable now. With the low interest rates in the developed world monetary situation is likely to remain calm for a long time. But the flow of liquidity from developed markets to emerging world is creating a tuff situation for regulatory authorities in countries such as India, China, Brazil and many other smaller yet progressive nations.

Emerging markets are growing on the back of superior financial systems, and they are going strong in their catch-up with the developed world. A key strength lays in their high saving ratios, unlike US, where people were largely succumbed under debt due to poor savings habit. Fundamentally, these fast growing nations appear strong as they are running efficiently on low budget deficits.

Solid Recovery to all time Highs

A key taking from the recent global recovery is the flying start by the emerging markets, which are now sitting at all time high levels. Some of these have already made up for the losses and now they are feeling the crunch of production capacities. This may appear a bit weird to an American reader, but that is a true case in many fast emerging nations. Their domestic demand is their main defense in times of global uncertainties. It’s easy to point bubbles in such markets, but the reality is much different. There is so much untapped potential in these markets that demand catch-up is faster than capacity expansions.

 

Emerging Market Investment Strategy 2011 and beyond

After making comparisons with the past P/E ratios, we can easily figure out that many emerging markets are still trading cheaper than their trading history. No doubt, the recovery has been very strong but there is still potential value left in emerging equities. If we take a look at non-sovereign bonds, a similar trend is in place where valuations can extent a bit further.

They key reason for this drag from the long term trend line for valuations could be a possible fear of a double-dip recession. Aggressive investors can take their chances in select sectors and blue chip stocks as they will possibly mint more returns in emerging nations, even if the tide turns red again.

Conclusion

Expecting a spectacular performance in emerging equities may not be right in current circumstances, but they can still rise considerably if the global economic outlook remains positive. Its best to stick with commodity related sectors as current hysteria can prolong throughout 2011, and currency appreciation will continue to support prices. These are times when it is a hard call to take investment risk, but purely from the fundamental point its worth risking it in emerging markets.

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