How the different regions of the world are coping with the credit crunch

Morocco has left Wall Street standing as China and Ireland suffered. We examine the effects of the crisis on a global portfolio

The credit crunch has produced some surprising winners and losers among global economies and stock markets.

Perennial laggard Germany has surprised with its strength: its economy grew 1.5% in the first three months of the year compared with a sluggish 0.4% in the UK.

However, its stock market is still down 5% since the start of the credit crunch last August, compared with a fall of 4% in the FTSE 100, according to figures from Morningstar.

Many favoured emerging markets such as China, which analysts hoped would “decouple” from the western ills, have also suffered falls. The Chinese market dropped 25% in the final three months of last year and has its previous strength to thank for an overall fall of 6.15% since the crisis. Overall, the best performing markets have been in oil-producing states as the price of crude has surged to record levels above $135. Morocco and Jordan are both up more than 30%.

We asked fund managers and market watchers where investors should be putting their cash — and which areas they should be avoiding.

NORTH AMERICA

Advisers report that UK investors’ long-term unwillingness to buy North American funds has developed into a refusal to contemplate taking a bet on the region since the credit crunch.

However, the US central bank, the Federal Reserve, took action earlier than most, and some commentators believe it will be one of the first countries to shrug off the effects.

Tom Walker, who runs Martin Currie’s US fund, said: “There have been a lot of poor economic data and people are understandably worried. But you have to remember that this is a very dynamic market with some of the best companies in the world.”

Many economists also believe that there is a good chance the dollar will strengthen against the pound over the rest of the year. Sterling stands at $1.98, but some analysts believe it will fall back as the UK economy continues to slow.

Philip Shaw, an economist with Investec, said: “Sterling is fundamentally overvalued against the dollar. Over the next five years, it will have to fall back into line.”

If you wanted to get back into America, analysts suggested funds such as Martin Currie North America or Neptune US Opportunities

Elsewhere in the region, Canada has been benefiting from an eight-year high in foreign investment. The latest figures show that during 2007 it attracted more than half a trillion dollars, up 14.4% on the year. The markets have reflected this, with the Morgan Stanley Capital International country index for Canada rising about 13% since last August.

However, the slowdown in America is starting to take effect and forecasters predict the Bank of Canada will have to cut interest rates more than expected as the downturn takes hold.

EUROPE

Billionaire investor Warren Buffett is touring continental Europe on the lookout for opportunities to buy into family-run firms. Some countries are more likely to interest him than others. Germany has largely avoided a credit meltdown of the sort Britain is experiencing because about 80% of the population rent their homes.

Spain, on the other hand, is suffering a housing crash that is arguably worse than that in the UK. Property prices are down by as much as 60% in some regions and the situation is not expected to get any easier. The European Central Bank does not have much room to cut interest rates because the strong euro has caused high inflation across the Continent.

Ireland, meanwhile, has plunged almost 25% since last August, and Portugal is down 19%.

Mark Dampier of Hargreaves Lansdown, an adviser, said: “Interest rates in Europe have been too low for countries such as Portugal and Ireland for some time now. In Ireland, for example, this has led to a huge house-price bubble that has not emerged in many of the other member states, including Germany.”

Analysts believe the outlook for the eurozone will deteriorate. While the euro areas grew at an annualised rate of 2.2% in the first three months of the year, this is expected to dip to 1% by the end of the year.

However, some analysts believe Germany will continue to outperform. Alexander Koch, economist at Uni-Credit in Munich, said: “The latest growth figures prove that the German economy is in better shape than most of its European neighbours.”

You can get exposure to Germany through the market-leading Odey Continental Europe fund, which is up 13% over the past 12 months.

Further east, the Russian MSCI index is up more than 27% over the past nine months, as oil has soared and the investment community largely welcomed the election of President Dmitry Medvedev. Mark Mobius of Franklin Templeton Investments said: “The new administration in Russia is expected to be good for businesses, while the tax treatment of oil companies is set to improve.”

Advisers think Russia will continue to perform well even if the oil price drops.

SOUTH AMERICA

Countries in South America have been among the stand-out performers because they have piggy-backed on the soaring cost of commodities.

Brazil, for example, is the world’s second biggest food producer and also exports iron ore, palladium and platinum. Brazilian stocks are up 12% since the start of the credit crunch.

However, increasingly volatile commodity markets have prompted some concerns about a potential downturn if the bubble bursts.

On the flipside, fiscal and monetary policies are becoming sounder and the region’s largest economy, Brazil, has stable economic growth and relatively low inflation.

Mobius said: “Brazil is benefiting from an upgrade in its sovereign rating at the moment, while Mexico is also doing pretty well.”

There is some concern about the impact of a US slowdown on Mexico, but Brazil should also continue to benefit from social changes such as a rise in the number of children attending school. About 97% of seven to 14-year-olds enrolled in schools last year.

Countries such as Peru, Panama, Argentina and Colombia are also starting to show the sort of economic dynamism more usually attributed to India and China.

AFRICA

There are three African countries — Morocco, Egypt and South Africa — in the list of the top 10 national indexes since August. Forecasts for the next few years are also good.

According to projections from the International Monetary Fund, sub-Saharan Africa will experience economic growth at an average rate of 6.6% over the next three years. Ghana is expected to grow at 7.3% and Nigeria at 8.1%.

Sub-Saharan Africa is also a fund manager’s favourite because its companies tend to be under-researched — giving them more opportunity to take advantage of mis-pricing.

The emerging middle class is another big plus. Only about 10% of people have bank accounts and only about 20% have mobile phones, so there is a lot of scope for growth.

Mobius said: “The market in South Africa has dropped a bit recently, but I expect it to do better. Consumer demand is growing and the country offers a great entry point for those keen to gain exposure to Africa’s natural resources.” Jamie Allsopp of New Star said: “Company earnings are growing strongly in South Africa, driven by domestic demand, in a region of the world that should see little direct impact from the global credit market fallout.”

Investing in Africa remains the preserve of the adventurous, however, not least because of the political risks involved. Liquidity is also low, with few companies having a market capitalisation of more than $500m.

Funds to choose from if you want exposure to Africa include JP Morgan Natural Resources and F&C Emerging Market excluding Pacific Asia.

ASIA

The decline of China’s stock market is not being blamed on the credit crunch. Philip Ehrmann, an investment director at Jupiter Asset Management, said: “China’s recent performance has little to do with the credit crunch per se and more to do with the knock-on effect on global funds.

“It was looking overpriced so this is basically a market correction that I believe will turn out to be little more than a blip in the longer term.”

Christian Deseglise at HSBC Investments said: “Emerging economies have much sounder government and consumer balance sheets.”

Asian investment experts also point out that banks in the region generally take a conservative lending approach, which has helped to protect them.

Matthew Vaight at M&G, a fund manager, said: “We feel the big banks in Singapore can use the credit crunch to expand.”

And while India suffered a sobering 23% correction in the first three months of the year, it is largely viewed as more attractive than China. India’s central bank is still forecasting growth of 8.7% for 2008-9.

Brian Dennehy, of financial adviser Dennehy Weller, said: “India has 25% of the world’s population of under-25s and a very high savings ratio. China can’t really match that.”

REST OF THE WORLD

Australia also seems to have brushed off the sub-prime crisis — thanks largely to its natural resources. Investment in mining projects has risen to record levels, reflecting expectations that the demand for Australian resources will continue to stay strong.

David Antonelli, head of global investments for MFS Investment Management, said: “With strong regulatory oversight, dynamic capital markets and consistent, long-term economic growth, the Australian market provides tremendous investment opportunity for our clients.”

Funds with exposure to this part of the world include Fidelity’s Australia fund and Henderson Asia Pacific Capital Growth.

Source Times on Line  July 2008