The Maturation of Emerging Markets
The S&P 500 has gained 18.8 percent so far this year, but the emerging markets—using the iShares MSCI Emerging Markets Index (NYSE: EEM) as a proxy—have slid by nearly 6 percent. Investors are worried that China’s economy is slowing and the US Federal Reserve might end its quantitative easing program.
But the news isn’t uniformly bad. Emerging markets have staged a fall rally, up nearly 10 percent over the past month, as market sentiment improves.
China’s service industries are posting strong growth, with the country’s non-manufacturing purchasing managers’ index hitting a six-month high of 55.4 last month. That’s a good sign that the government’s fiscal support measures such as spending on urban infrastructure and railroads helped foster a broad based recovery in the third quarter.
A number of other emerging market nations are also getting some positive press, thanks to reform-minded political leaders.
Mexico is a salient example, promoting growth by loosening the state’s reins on its energy resources, implementing fiscal reforms and restructuring its educational system. Since his election last year, President Enrique Peña Nieto and his Institutional Revolutionary Party have worked to reshape Mexico’s institutions into more liberal, market-oriented ones.
While it isn’t talked about much, the Philippine economy is undergoing a similar transition.
The country has long been known for endemic corruption and, as in most countries, Filipino politicians rely heavily on bringing spending to their regions to hold onto their offices.
But since President Benigno Aquino III was elected in 2010, he has waged an aggressive anticorruption campaign, investigating billions of pesos worth of questionable government transactions and pushing for the prosecution of hundreds of politicians suspected of corruption.
Largely thanks to his efforts, the Philippine economy grew by 7.5 percent in the third quarter, making it one of the fastest-growing countries in the emerging markets. By bringing corruption to heel, Aquino has successfully attracted a growing flow of foreign investment to the Philippines and, by trimming much of the pork in the government’s budget, has helped reduce the country’s deficit.
In addition to driving economic growth, Aquino’s policies have now helped the country secure investment grade ratings from all three of the major credit rating agencies, with Moody’s recently bumping its rating by one notch to Baa3 from Ba1. Low inflation, strengthening fiscal management and growing government revenue all helped prompt the upgrade.
The Philippines have also benefited from the fact that it isn’t as dependent on commodity exports as many of its neighbors. It also runs a large current account surplus, making it less dependent on foreign capital, though expanding investment has played a major role in the country’s growth. The now unanimous investment grade rating will certainly help attract even more investment.
Both the Philippines and Mexico are excellent examples of how several emerging market nations are undergoing a natural maturation process, developing durable institutions that will one day make them “developed” nations.
There will be bumps in the road along the way, such as when the Fed inevitably winds up its easing program, but to successfully invest in emerging market nations we have to keep sight of our long-term goals.
Portfolio Update
After peaking at 17 following its favorable write up in Barron’s last month, as I predicted shares of AutoNavi Holdings (NSDQ: AMAP) have come back down and found support around my buy target of $15. For now, though, I don’t plan on adjusting my target, preferring to wait until after third quarter earnings are announced November 12.
As management noted in its latest report, the company has fallen behind in the smartphone market and has begun making its maps available for free, to garner a broader market share in the space. While the plan sounds promising, I’m waiting to see if that translates into greater profitability before moving my target.
AutoNavi Holdings remains a buy on any dips below 15.
But the news isn’t uniformly bad. Emerging markets have staged a fall rally, up nearly 10 percent over the past month, as market sentiment improves.
China’s service industries are posting strong growth, with the country’s non-manufacturing purchasing managers’ index hitting a six-month high of 55.4 last month. That’s a good sign that the government’s fiscal support measures such as spending on urban infrastructure and railroads helped foster a broad based recovery in the third quarter.
A number of other emerging market nations are also getting some positive press, thanks to reform-minded political leaders.
Mexico is a salient example, promoting growth by loosening the state’s reins on its energy resources, implementing fiscal reforms and restructuring its educational system. Since his election last year, President Enrique Peña Nieto and his Institutional Revolutionary Party have worked to reshape Mexico’s institutions into more liberal, market-oriented ones.
While it isn’t talked about much, the Philippine economy is undergoing a similar transition.
The country has long been known for endemic corruption and, as in most countries, Filipino politicians rely heavily on bringing spending to their regions to hold onto their offices.
But since President Benigno Aquino III was elected in 2010, he has waged an aggressive anticorruption campaign, investigating billions of pesos worth of questionable government transactions and pushing for the prosecution of hundreds of politicians suspected of corruption.
Largely thanks to his efforts, the Philippine economy grew by 7.5 percent in the third quarter, making it one of the fastest-growing countries in the emerging markets. By bringing corruption to heel, Aquino has successfully attracted a growing flow of foreign investment to the Philippines and, by trimming much of the pork in the government’s budget, has helped reduce the country’s deficit.
In addition to driving economic growth, Aquino’s policies have now helped the country secure investment grade ratings from all three of the major credit rating agencies, with Moody’s recently bumping its rating by one notch to Baa3 from Ba1. Low inflation, strengthening fiscal management and growing government revenue all helped prompt the upgrade.
The Philippines have also benefited from the fact that it isn’t as dependent on commodity exports as many of its neighbors. It also runs a large current account surplus, making it less dependent on foreign capital, though expanding investment has played a major role in the country’s growth. The now unanimous investment grade rating will certainly help attract even more investment.
Both the Philippines and Mexico are excellent examples of how several emerging market nations are undergoing a natural maturation process, developing durable institutions that will one day make them “developed” nations.
There will be bumps in the road along the way, such as when the Fed inevitably winds up its easing program, but to successfully invest in emerging market nations we have to keep sight of our long-term goals.
Portfolio Update
After peaking at 17 following its favorable write up in Barron’s last month, as I predicted shares of AutoNavi Holdings (NSDQ: AMAP) have come back down and found support around my buy target of $15. For now, though, I don’t plan on adjusting my target, preferring to wait until after third quarter earnings are announced November 12.
As management noted in its latest report, the company has fallen behind in the smartphone market and has begun making its maps available for free, to garner a broader market share in the space. While the plan sounds promising, I’m waiting to see if that translates into greater profitability before moving my target.
AutoNavi Holdings remains a buy on any dips below 15.
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