Emerging Asia is generally seen as the area with the most potential. According to Morningstar’s European Fund Trend Survey for November some 56% expect the market to perform best over the next 12 months. However, one risk facing these markets is that a downturn in China’s economic growth could hurt their performance.
Political uncertainty is another risk for investors
in emerging markets. This was brought home in October when the chief executive of Yukos, a Russian oil company, was arrested on charges of tax evasion. Despite denials by Vladimir Putin, the president of Russia, many said the arrest was politically motivated.
Investors’ belief in a stronger economy, especially in America, has fuelled global stockmarkets. Recent statistics seem to indicate that such faith may be justified. American GDP growth in the third quarter, at an annual rate of 8.2%, was the fastest since 1984. But there are still some who argue that the economy’s strong recent performance is unsustainable.
The MSCI USA index was up by about 21% this year as of November 28th while smaller companies continue to outperform larger ones. Growth companies also continue to outperform value ones. The Morningstar Small Growth index, which measures the performance of small growth shares listed on the American market, was up 53% from the start of the year to November 28th. Over the same period the Morningstar Large Cap Value index had only gained 14%.
Japanese sentiment
Attitudes towards the Japanese stockmarket have fluctuated dramatically over the recent period. The Nikkei rose from a low this year of 7607 in April to a high of 11,161 in October before falling back again. In Morningstar’s October survey some 59% of fund groups said that the renewed interest in Japan was part of a long-term trend. However, sentiment seems to have dimmed since then.
Interest returned this week with the nationalisation of Japan’s 10th largest regional lender, Ashikaga Bank. Investors see this as a step in a direction where the country is taking much firmer action in cleaning up the banking sector. In the case of Ashikaga Bank shareholders will not be saved as happened when the government rescued Resona Bank in May.
As fund managers are finding less value in the American market they are becoming increasingly positive towards the prospects of the euro-zone. According to November’s European Fund Trend Survey some 18% of fund groups expect Europe excluding the UK to be the best performing market over the next 12 months. The MSCI Euro index rose 27% over the year to November 28th.
There are some worries for investors in the euro-zone. Last month European finance ministers, under pressure from France and Germany, suspended the sanctions mechanism under the stability and growth pact. In effect this means that both countries have got away with flouting one of the main rules governing economic relations within the euro-zone.
The exact outcome of this breach of the stability pact is unclear and there was no immediate reaction from the financial markets. However, higher inflation and higher interest rates could be the result if fiscal policy becomes looser in the euro-zone.
