NEW YORK (Reuters) - The coming week, with Tuesday's New Year's holiday limiting trading activity, will provide time for investors to reassess geopolitical risk levels in light of the turmoil in nuclear-armed Pakistan.
By Daniel Bases
NEW YORK (Reuters) - The coming week, with Tuesday's New Year's holiday limiting trading activity, will provide time for investors to reassess geopolitical risk levels in light of the turmoil in nuclear-armed Pakistan.
Pakistan, a relatively small player in terms of emerging market assets, was making progress in lifting its economy through privatization, foreign direct investment and better fiscal management.
But the assassination of opposition leader Benazir Bhutto on December 27 thrust the country with its already volatile political environment into crisis. There are rising fears elections scheduled for January 8 may be postponed.
!ADVERTISEMENT!Emerging market investors, historically, have taken such ructions in geopolitics in stride. However, with more stable governments and finances and a U.S. credit crunch undermining markets in developed countries, emerging markets have drawn in newer -- and less tested -- investors.
"Compared to past history, it has been a more modest year, but compared to some of the returns in other asset classes, for example U.S. high yield or ABS (Asset Backed Securities), the fundamentals are still supportive .... Emerging markets have held up well in a difficult environment," said Claudia Calich, senior emerging markets portfolio manager at INVESCO in New York.
"I think next week people will be coming back to reassess and one of the main things will be the news from Pakistan," she added.
As of December 28 and with just one trading day left in the year, the benchmark JP Morgan Emerging Markets Bond Index Plus is likely to finish up 6.345 percent.
However, that was below the 8.1 percent year-to-date return on super-safe U.S. Treasuries, according to Merrill Lynch data.
But for the riskier asset classes, it was no contest for emerging markets. Investors in U.S. asset-backed securities lost 4.1 percent so far this year, the worst performance of any major U.S. fixed income asset class. U.S. high-yield bonds returned only 1.97 percent, the second-worst performance of any major bond class.
Performance of the EMBI+ is down from recent years. The index returned 10.486 percent in 2006 and 11.86 percent in 2005.
In the difficult credit environment, it was emerging market equities that proved the big winner in 2007.
The Morgan Stanley Capital International emerging markets stock index <.MSCIEF> rose 36.64 percent.
According to Boston-based EPFR Global, a tracker of fund cash flows and performance, Latin American stocks was the best performing broad equity fund sector, rising 59.90 percent in the week ended December 26. Asia ex-Japan was second, rising 51.34 percent, while All Dedicated Emerging Market funds were the third-best performing, up 43.96 percent.
Among the sub-fund groups, the top four geographic regions in terms of performance for the year were all emerging market regions. Brazil was first, with a 96 percent return, followed by China at 75 percent; Turkey at 69 percent; and Africa regional funds with a 68 percent gain, EPFR data showed.
(Editing by Steve Orlofsky)
