Analysis round-up

14/07/2006 | Duncan Hooper

S&P analyses global equities; short rates interest Dresdner; Deutsche has "positive bias"

Standard & Poor's calculates that developing countries' stocks continue to underperform but Deutsche Bank decides it's time for a "positive bias" on emerging markets. Dresdner urges client to watch short-term rates and Standard Chartered is cautious on Mexico.

    Emerging market equities fell 0.57% in June, compared with a 0.14% drop in developed country stocks, according to Standard and Poor’s. Emerging market companies have lost 4.81% of their value this year, while their peers in developed nations have registered a small gain. Nigeria’s 7.51% rise in June was the best performance in US dollar terms, followed by Argentina which managed 6.69%. Colombia saw the biggest monthly drop, sliding 17.53%, the ratings agency said.

Short-term interest rates are likely to gain in importance in coming months, Dresdner Kleinwort Wasserstein predicts. The pass-through from currency moves to inflation, notably in deficit countries like Turkey, has become more marked and rates are also going to be an important driver to attract foreign capital when markets stabilize, the bank said. Brazil, where the central bank has scope to continue rate cuts, and Argentina, China and Russia, where currencies may appreciate are attractive, Dresdner said.

Deutsche Bank forecasts that the outflow of capital from emerging market debt funds may be close to ending with the exception of European Union convergence funds which could continue to suffer. Latin American currencies and equities offer superior investment prospects to fixed income, the bank wrote in its monthly report. Deutsche declared a “positive bias” on emerging market assets, noting that central banks in South Africa and Turkey have responded vigorously to inflation concerns and elections in Latin America have produced mostly positive outcomes.

The victory of Felipe Calderon in the Mexican presidential election may provide a short term boost to bonds and currencies but looking further forward upside is limited, wrote Standard Chartered’s chief Americas economist Doug Smith. A divided congress will probably stall efforts to implement reform, suggesting that “all the good news is priced in”, Smith said.

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