Emerging Markets: the Coming Bounce

These hard-hit economies could be the first to dig out of the global credit crisis.

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After an awe-inspiring run for most of this decade, emerging markets have finally hit the skids. The MSCI Emerging Markets Index is off 53 percent so far this year, and many individual countries—such as Russia and China—are down even more. Veteran emerging markets investor Josephine Jiménez, manager of the new Victoria 1522 fund, says the steep declines are largely due to sell-offs by foreign investors, who have long accounted for more than a third of the trading volume in emerging markets. Combine fears of a global economic slowdown with plummeting commodity prices, and there you have the collapse. U.S. News sat down with Jiménez to talk about China's new stimulus plan, the countries best positioned for a rebound, and companies bucking the global slowdown. Excerpts:

Will it take longer for emerging markets to dig out of the global credit crisis than developed countries?

Many of these economies can stand on their own. The average percentage of exports to [gross domestic product] is 15 percent, so 85 percent of GDP is domestically oriented. That means exports of emerging markets overseas don't represent as much as they used to. I think they'll be able to recover faster. Their banking systems aren't as stretched, measured by loans to deposits, so they have the ability to fund growth. What's your take on China's stimulus plan?

China's move to stimulate its economy was the right thing to do, in terms of increasing its potential output, its employment levels—and boosting confidence. China is the world's fourth-largest economy, and this will help them post faster growth. They may be able to grow 8 percent in 2008. This is also helpful to other economies supplying basic materials. Which emerging economies are best positioned for a rebound?

Brazil and China are the two most attractive at the country level. But I focus on select industries. Brazil is an important supplier of iron ore, steel, ethanol, agricultural products, [and it] has a well-diversified economy and a banking system that is undergoing changes through mergers in order to improve operating structure. Brazil supplies basic materials to China, including iron ore. India is also attractive from a long-term perspective; banks have lending capacities and low nonperforming loans but need to improve their operating structure since cost/income ratios [a measure of a bank's operating efficiency] are high. The higher the ratio, the less efficient the bank. What sort of companies do you invest in?

We focus on those with a lot of cash in the bank, which is especially important now. We want companies with more cash than short-term debt. Currently, we're focusing on gold mining, fertilizers, food and supermarket stocks, and pharmaceuticals. Examples of companies we like include Fosfertil, a Brazilian fertilizer producer. The company is investing to increase its capacity by 2 million tons a year, which essentially doubles its annual production. Profits are growing rapidly, and the company is financially sound. We expect phosphate pricing to remain strong over the long term, especially considering that the present agricultural output of China is only $277 per capita and India is only $162—well below the $358 average for emerging markets and the $620 average for the developed economies. What's more, the demand for agricultural chemicals will remain high as China and India prosper. 

China Molybdenum is another company we like. Molybdenum, a high-strength steel alloy, is used in the production of stainless steel, aircraft parts, industrial motors, as well as in coal liquefaction [the conversion of coal into liquid fuel, such as gasoline or diesel]. It also accounts for 20 percent of the raw material used in missiles, so the company looks to benefit from increased defense spending worldwide. Finally, it's used in fertilizers, medicine, and as a catalyst in the removal of sulfur, nitrogen, and heavy metals in crude oil refining. The company's revenues and profits are rising, as worldwide demand is growing at 3.5 percent to 4 percent annually.