Morgan Stanley on Emerging Markets: Maximum Overweight
Hello all,
What a day. After one of the worst weeks in global economic history, markets across the board soared after the news of that the G-7 will be putting in a coordinated bailout effort. Brazil was up 14% (the iShares MSCI Brazil fund EWZ was up 26% for the day), India was up 7%, and according to the Emerginvest heat map, China’s Shanghai A share’s composite was up 3.6%. However the global rally didn’t stop simply with the BRIC countries (Russia didn’t get the invitation apparently), indexes across Latin America, Asia, Africa, and Eastern Europe felt the relief: Czech Republic rose 11%, Hungary 6%, Saudi Arabia 10%, Dubai 11%, Chile 13%, and Mexico 11%.
One of the best indicators was that the iShares MSCI Emerging Markets Fund (EEM) jumped 23%.
For me, it was a tremendous relief to see the rebound today. But we – as in the globe – are not out of the woods yet.
This kind of rebound helps to reinforce how monumental last week was in terms of losses. My firm belief (and I’m sure there are volumes of documented medical evidence of this from people far more qualified than I in human psychology), is that the human psyche classifies news into neat categories, and once it exceeds those categories, people don’t know how to process it immediately so they mentally shut down. Clearly, somewhere around Tuesday or Wednesday of last week, most common investors already surpassed their classification of “extremely bad,” so they mentally shut down, not knowing how to process the magnitude of losses occurring (which I believe contributes heavily to the sell off panic).
That kind of tectonic shift in the economic landscape cannot, and will not, be solved by a single day’s rebound. It is still a heavily volatile market place, and I still expect to see losses occurring in varying sectors/countries around the globe.
However, it does signal good news to investors that hopefully the market will slowly shift from being the fear-dominated market place it is now, to a more rational one. In the wake of fear-induced sell offs worldwide, there are tremendous bargains to be had in almost every corner of the globe. An article from MarketWatch called: “Stocks, currencies in emerging markets rally,” describes how “Morgan Stanley upgraded Monday emerging market equities to the maximum overweight of 10% above the benchmark, saying that the catalysts for a rally are the action by the Group of Seven countries to underpin systematically important financial institutions as well as the oversold conditions.”
They go even further to state that “100% of all GDP growth worldwide in 2009 will originate in emerging markets.” I’m not sure if I can buy into the magnitude of that statement, but it certainly is an interesting point that Morgan Stanley predicts the world economy to be virtually entirely emerging-markets led for 2009. They at least make a significant case for bargains due to massive overselling, evidenced by most EM funds and worldwide indexes as investors scrambled to pull their money out of their “risky” emerging market assets when the developed markets started to tank.
In short: The near future will still be volatile, but today was a great first step in stopping the downward spiral. And to close with a metaphor, I think now is a good time to look to emerging market stocks - just like the best sea shells are washed up on the beach after a hurricane.
Best,
Jonathan
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Filed under: Commentary on World Financial News, Emerging Markets, Jonathan (Marketing), World Analysis
What did everyone think? I personally like the ending metaphor.
been watching HOGS.. Bought 100 share yesterday and again today on a little pullback… Tell you what… Lets see how I do in a week… I’ll let you know and then you can dip your toe in then if this great, but horribly hammered stock rallies…. How about that?
jegan
Just came across this article on the Baltic Dry Index… This explains why I am only really interested in Chinese companies that are not tied to the exterior world:
——————————————————————————-
Baltic Dry warns of tough times on the horizon
The index, a proxy for world trade flows, has fallen more than 80% since July and is now at a three-year low
* Ashley Seager
* guardian.co.uk,
* Tuesday October 14 2008 17.38 BST
The Baltic Dry shipping index, which has been flashing amber signals about the world economy for the past couple of months, is telling us there is something going badly wrong because it is now stuck firmly on red.
The index, a proxy for world trade flows, suffered its second biggest-ever fall yesterday, to 11%, which took it down under the $2,000 mark and it fell another 8% today to $1,809. The drop means it has fallen more than 80% since July’s peak of around $12,000 and is now at a three-year low.
The index has long been seen as a good leading indictor of future economic production levels because it charts the cost of freight movements in 26 of the world’s biggest shipping lanes of “dry” materials, such as coal, iron ore and grain which feed into the production of finished goods some weeks or months ahead.
The index may also be telling us something scarier. It may be telling us that the world’s great industrial powerhouse, China, could be in trouble and that its imports of raw materials are collapsing at a far greater pace than the slow slide in demand from the West for China’s finished goods would imply.
There have been increasing concerns about China this year. It has been booming for years and growing, if the official figures are to be believed, at more than 10% a year. That has, in turn, given rise to a stockmarket and housing market boom which now look to be going pop, as ours have done.
The great Asian miracle economy might now be coming apart at the seams, in spite of the official figures suggesting everything is stillfine. But the Chinese authorities cannot control the Baltic Dry.
jegan ….
Also like to add that Fortesque Mining (Aussie Iron FSUMF.PK) has had cancellations and non-payment of orders from China as well recently..
Hi Emerginvest Blog,
I’m emailing you in regards to an email I sent to you last month about a partnership, have you had a chance to think about it?
If you would more information about the proposal, please let me know.
I look forward to hearing from you.
Kind Regards,
Andrew Knight.
Website Manager
Banking & Finance Division
Asia-Pacific Region
Boomerang.com.au (Australia) Pty Ltd
E: andrew.knight@boomerang.com.au
very well written
And more regarding steel and shipping :
Fortescue Renegotiating Iron Ore Freight Contracts, Herald Says
By Jesse Riseborough
Oct. 17 (Bloomberg) — Fortescue Metals Group Ltd. is renegotiating freight contracts for iron ore shipments with some of its Chinese steel mill customers, the Sydney Morning Herald reported, citing executive Russell Scrimshaw.
Fortescue has locked in shipping freight contracts for about half of its customers in China and was now renegotiating some deals to assist buyers amid a slump in the price of steel and bulk shipping rates, the Herald said. Freight rates have dropped as low as $9 a metric ton from a peak of $50, the report said.
Smaller steel mills in China have been tightly constrained by slowing demand, the Herald reported, citing Scrimshaw. None of Fortescue’s customers are getting a discount on the contract price of iron ore, it said.
Fortescue, which sells ore to 38 different mills, had locked in freight contracts with mills at $24.50 a ton, the report said. Delong Steel Ltd. has indicated it can pay no more than $9 a ton and Aosen Steel $11 a ton, the Herald reported, citing unnamed sources.
John,
Interesting! Thanks for the input.
-Jonathan