RARE Infrastructure Emerging Markets Commentary – November 2009
November started out pretty much as expected for EM markets – up strongly and out-performing their developed peers. The Dubai hiccup towards the end of the month cost them some of their gains but on balance the key markets all ended November in positive territory with China and LatAm the star performers (Shenzhen +12.5% & Shanghai +6.7%, Brazil +8.9%, Mexico+8.1%, India +7.2%, Indonesia +2.0%, Malaysia +1.3%, Thailand +0.6% & Hong Kong +0.3%).
The big news for November came from Dubai when on the 25th the government sought a delay in debt repayments for the real estate developer Nakheel and its parent company, Dubai World (a large government entity). Dubai fell sharply and many markets followed suit on fears that this was the first of many hidden sovereign defaults. However, although not good news, we don’t think the situation is as serious as first anticipated. We do believe that the situation will be resolved within the UAE although not without the other Emirates demanding their pound of flesh from Dubai – forcing them to restructure and pay the price for over gearing (and over development).
Elsewhere, we saw the first signs of the hinted tightening from the EM economies with China leading the way (has pulled back on its fixed asset investment and started to restrict the level of new loans coming to the market). While this can be considered “quasi” tightening we actually think it may have a more visible impact on China’s demand than traditional monetary tightening measures (high savings rates in China at all levels suggest an interest rate hike will not have the same impact as it would in a developed market). However, the response to date has been measured and slow and we don’t expect significant additional policy measures until the second half of 2010 (timing dependant on the strength of the domestic demand story rather than recovery of the developed world). Further, all that fuel remains in the tank should we see a double dip in global demand with the EM governments having the ability to move very quickly – although investors seem now to be more wary of the next bubble as opposed to the double dip that was expected across 2009.
We continue to believe that the EMs will perform better (on fundamentals) than developed peers over the next 12 months and that exposure to EM consumer demand is the place to be in 2010 – demographically favouring those countries with strong government balance sheets (safety net).
