RTS is where NNRF needs to be in 2008...
East European Markets Turn Bearish
Fears of a U.S. recession have hurt growth in the emerging markets of Central and Eastern Europe. Russia appears to be the exception
by S. Adam Cardais
Physicist Niels Bohr once famously remarked that, "Prediction is very difficult, especially about the future."
The Nobel Prize winner might well have been talking about the stock market, for economists are notorious equivocators whose forecast-accuracy averages often dip to bottom-dwelling levels.
Yet the many analysts who at the close of last year predicted 2008 would be a volatile, if not rough, year for stock markets appear to have called it right.
The first five days of trading this year saw the Standard & Poor's 500 drop 5.3 percent overall on fears that the ripple effects of the U.S. credit crisis and a startlingly sluggish December U.S. jobs report, released 4 January, presaged a recession.
Fears of a global economic slowdown on a U.S. recession have shaken the young capital markets of Central and Eastern Europe, many of which have boasted strong growth in the last five years. The Prague Stock Exchange had the worst start in its 15-year history in the first three days of 2008, falling 3 percent. Warsaw and Budapest also took early hits.
"The Czech market is nervous because of the U.S. economy. Everybody is looking at the U.S. now," Raiffeisenbank analyst Ales Michl said, adding that the probability of a U.S. recession means investors are looking to minimize risk, a trend that is always bad for emerging markets.
The good news for investors is that American consumers' reluctance to curb spending, even when they probably should, might just help the United States dodge a recession. Not so good is the fact that, historically, markets' January results are usually a portent for the entire year.
Thus, chances are good 2008 will be a sluggish year for not only the U.S stock exchange, but also emerging markets.
LOOK TO THE BEAR
"Overall, our view is that emerging markets are not going to be the place to be this year," said Max King, a strategist with Investec Asset Management in London.
For investors who've been making big gains in Prague or Warsaw or Budapest and don't intend to spend 2008 on the sidelines, what's the best strategy? In a word, Russia.
Of the major emerging markets, Russia appears to be an exception to the largely bleak forecasts. It has already proven resilient to global economic shakiness and is predicted to be among the strongest emerging stock exchanges of 2008.
Since 28 December, Moscow's benchmark RTS index is up a percentage point. And though its 19 percent growth last year fell well short of the 2006 figure of 70 percent, analysts predict the RTS could top 3,000 points by the end of 2008, a year-on-year growth exceeding 30 percent.
Expectations are high thanks largely to President Vladimir Putin's nomination of Gazprom Chairman Dmitri Medvedev as his successor and the likelihood that Putin will become prime minister. Both are signals to investors that the regime that delivered Russia from economic chaos in the late 1990s to a period of sustained growth and booming foreign investment isn't going anywhere. It also doesn't hurt that oil prices keep setting record highs.
In the gloomy investment climate of 2008, analysts predict Russia's thriving economy and influx of foreign capital will make the RTS a haven for buyers.
"The market here should continue to perform even if the economies in Western Europe and the U.S. do not," Philip Townsend, head of research at Metropol, told The Moscow Times last month. "If things do get rough, fund managers will technically still be trying to find a home for their money, and Russia will be an obvious example of where to put [it]."
Stock strategists are almost uniformly bullish on Gazprom, which should continue thriving on rising energy prices. King, however, cautioned against large capitalization Russian stocks, especially in resources, as Investec Asset Management sees oil prices falling this year. King said consumer sector and smaller capitalization stocks, which should benefit from Russia's surging economy, are a good bet. He recommended the Russian Prosperity Fund, which the S & P named the Best Russia/CIS Fund in 2004.
Investors looking to maintain a position in the markets of Central or Eastern Europe would be wise to take a look at telecoms -- Michl recommended Telefonica O2 on the Prague exchange -- but also to expect more modest gains. For instance, the Prague exchange isn't expected to grow more than 10 percent this year, compared with 14.24 percent last year.
Analysts advise riding out January before writing any big checks because stocks are expected to take their worst hit this month, and King said buyers should limit their involvement in the majority of emerging markets this year to picking a safe fund with a good manager and waiting for 2009.
Whatever your investment strategy for 2008, remember that markets are likely to throw out a few more surprises than usual. And, by all means, don't forget the wisdom of Niels Bohr.
