Emerging markets have the edge

Tue, 3 Aug Pre-Open

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The Chinese juggernaut seems to be slowing down a bit. As per a manufacturing survey, manufacturing activity fell for the first time in China since the financial crisis was at its height in March 2009. What is more, the economy already slowed from April to June, expanding at a 10.3% annual clip after 11.9% growth in the first quarter. Whether this is just a temporary blip or a harbinger of more bad news in the coming quarters remains to be seen. China of late has been trying to change the structure of its economic growth by focusing more on domestic production than on exports. However, this is likely to be a gradual shift. In the meanwhile, dampened demand in both the US and Europe means that Chinese exports atleast will take a while to pick up.

India and Russia though fared better. India is witnessing its 16 month of expansion as far as manufacturing is concerned. Russia's activity has been improving for the seventh month in a row. The limelight in recent times has been increasingly focused on emerging economies. And since it will be a while since the developed world will get back on its feet, there are hopes that the growth in the emerging markets will pull the global economy out of its slump. That said, emerging markets themselves have become increasingly entwined with the rich world. Thus, they are no longer immune from the shocks in the developed world as the global financial crisis has amply demonstrated.

What gives the emerging markets an edge over their developed peers though is the huge scope for growth. Many pockets in these economies are underpenetrated providing abundant room to grow. The markets in the developed world have become mature. And so the lesser scope for growth. Plus, the recovery in the US and Europe seems to be taking place at snail's speed. In the US, unemployment has refused to abate. Plus, housing activity has not picked up either raising fears of a double dip recession there. Europe continues to be mired in debt problems. There are fears that the severe austerity measures undertaken by European governments would thwart growth further. Meanwhile, the debate rages as to the timing of the withdrawal of stimulus measures.

Little wonder then that foreign money has been pouring in the emerging markets in droves. To such an extent that valuations in these markets are beginning to look increasingly pricey. In India, too valuations are not at that comfort level as they were before the rally began in March 2009. And so investors will have to be more vigilant than ever while choosing their stocks. Good quality of managements, consistent growth in revenues and profits and attractive valuations make a heady cocktail. Many Indian companies fit the bill as far as the first two parameters are concerned. One just needs to identify them. Only then will you be able to go in for the kill once the price becomes suitably attractive.