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Emerging influences

International political developments will play a major part in stockmarket trends.

US domestic consumption trends will also continue to have a major impact on the economies of emerging, as well as developed, countries. The prospect of further debt defaults remains as many governments in emerging markets find fiscal discipline difficult.

But there are some positive signs that global emerging markets will outperform, at least in relative terms. Prices of commodities, on which so many emerging economies depend, have held up reasonably well, especially in dollar terms. The trend towards better institutional and corporate governance is being maintained. After the Argentine default, the IMF may be showing a more realistic attitude to the pace at which fiscal deficits can be tackled. Valuations are generally attractive, especially compared with the developed world.

Regionally, it is most easy to be enthusiastic about emerging Asia and, more specifically, China. Low interest rates, a weaker trend in the US dollar (to which many currencies are formally or informally linked) and above-average economic growth projections make for a powerful cocktail of positive stockmarket ingredients.

Recent developments in North Korea cast a shadow but we expect some form of rapprochement between the various parties before long. India, Malaysia and Thailand seem set to perform well although Indonesia and the Philip-pines may have to overcome economic disappointments.

The outlook for Emerging Europe, Middle East and Africa (EMEA) is more dependent on regional political considerations. Emerging Europe should continue to benefit from convergence with the EU but sizeable quality companies in this area are few and far between. Although the Russian stockmarket is increasingly encompassing sectors outside energy, the oil price remains a key influence. Fortunes in the Middle East will depend to a large extent on political developments. South Africa may continue to recover in currency and stockmarket terms but social and economic, as well as political, problems still demand a market discount.

Latin America, as usual, has the most potential for surprising on both the upside and the downside. Much depends on the new Brazilian president&#39s success in walking the tightrope between satisfying international creditors and matching the expectations of his grassroots support. Mexico will continue to depend on the US economy to drive growth and must be careful not to lose further competitiveness to China. There are some exceptional reasonably priced companies available in this market. Chile offers potential, particularly if commodity prices perform well.

In terms of industries, we continue to favour pharmaceuticals in EMEA, resources in Latin America, gold stocks in South Africa and Asian consumer staple companies.

Although volatile, relative emerging markets performances in 2002 confirmed that investors are no longer treating the asset class as a single homogenous whole. Once again, a strong emphasis on focusing on quality companies throughout the universe should pay dividends.


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