As the tumult continued into 2015, discerning emerging-markets investors saw opportunity,
Bloomberg Markets magazine will report in its March issue.
They're bullish on China, South Korea and, despite a 50-plus percent drop in the oil price in 2014, the Gulf nations.
South Korea tops Bloomberg Markets' fourth annual ranking of the most-promising emerging nations in which to invest in 2015, with Qatar No. 2, China No. 3 and the United Arab Emirates No. 4. Saudi Arabia heads the list of the most-promising frontier markets.
"Both Korea and China look attractive at this stage," says Mark Mobius, who oversees $40 billion as executive chairman of Templeton Emerging Markets Group.
Noting that China and South Korea are oil importers, Mobius says, "Both markets will benefit from low oil prices and relatively high economic growth."
More than half of the market capitalization of South Korea's Kospi Index of stocks consists of exporters, says Hartmut Issel, head of Asia-Pacific investment at UBS Wealth Management. Samsung Electronics Co. alone accounts for 17 percent of the market.
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The fate of Korean stocks is thus largely determined by how big customers such as the U.S. are doing," Issel says.
Optimism about Korea is tempered by its competitive weakness against rival Japan.
"A major issue for the Korean market is the relative value of the won versus the yen," says Jim O'Neill, retired head of Goldman Sachs Asset Management.
The yen fell 11 percent against the won in the 12 months through Feb. 2. A weak currency makes exported goods cheaper.
The South Korean economy grew at an anemic 0.4 percent pace in the three months through December from the previous quarter, according to the Bank of Korea.
China's markets were unaffected by the emerging-markets crisis, with the Shanghai Composite Index rising 58 percent in 2014, including reinvested dividends, after slumping 3.9 percent in 2013.
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I don't understand why people are so negative about China," says O'Neill, who coined the term BRICs in 2001 to highlight the rising economic power of Brazil, Russia, India and China. "I assumed China would grow by 7.5 percent a year this decade," he says. "So far, it will have averaged 7.9 from 2011 to 2014."
The Bloomberg Markets emerging and frontier markets rankings are based on 19 measures of the investing climate, from forecasts of gross domestic product growth for the next two years to the ease of doing business.
MSCI Inc., a New York–based publisher of equity indexes,
designates countries as emerging or frontier based on a variety of criteria, including trading volumes, restrictions on foreign investors, corporate governance, and currency and political stability.
In 2014, MSCI moved Qatar and the U.A.E. from the frontier to the emerging index, which helped them pull in $3.5 billion from global emerging-markets funds, according to EFG-Hermes Holding SAE.
South Korea, widely considered a developed market, remains on MSCI's emerging list because of limits on the convertibility of the local currency and restrictions on access to its markets.
Saudi Arabia is classified as frontier because it limits direct investment in its markets to the six members of the Gulf Cooperation Council, or GCC. Others can invest only via swaps or ETFs.
In July, Riyadh announced it would remove those restrictions. It may do so in April, according to two people familiar with the matter. That will set the conditions for it to be designated an emerging market as early as 2017, Sebastien Lieblich, head of MSCI Index Research, told Bloomberg in July.
The Saudi stock market had a market cap of $537.36 billion as of Feb. 2, making it the biggest market in the Middle East by far. The Tadawul All Share Index rose 3.1 percent in the 12 months through Feb. 11. Among its listed stocks are Saudi Basic Industries Corp., one of the world's largest petrochemical producers; Al Rajhi Bank, the biggest Islamic lender; and Kingdom Holding Co., the investing vehicle of billionaire Prince Alwaleed Bin Talal Al Saud.
The oil price plunge is certain to carve a hole in the budgets of the Gulf oil and gas exporters. The government of Saudi Arabia is already projecting a budget deficit of $39 billion for 2015. Yet the government of the late King Abdullah refused to countenance a reduction of oil production to drive up prices in meetings of the Organization of Petroleum Exporting Countries.
The king died at the age of 90 in January and was succeeded by the crown prince, Salman bin Abdulaziz Al Saud. Analysts didn't expect the kingdom's oil policy to change under Salman, 79.
Money managers point out that Saudi Arabia and other Gulf nations can easily fund their ambitious domestic development projects by drawing on the dollar reserves they built up while petroleum prices were high.
"GCC governments have accumulated massive surpluses in the past decade thanks to elevated energy prices," says Dubai-based Rami Sidani, the head of frontier markets investing at Britain's Schroder Investment Management.
The reserve amounts are $726.5 billion for the Saudis, $74.7 billion for the U.A.E. and $42.2 billion for Qatar, according to data compiled by Bloomberg.
"The main growth driver in this part of the world is government spending," Sidani says, "and we expect these governments to proceed with that in order to diversify their economies."
That makes consumer companies, real estate and the banks that fund them a good bet, says Hootan Yazhari, managing director for global frontier markets at Bank of America Merrill Lynch. He recommends Dubai-based Emaar Properties PJSC and Abu Dhabi–based Aldar Properties PJSC, First Gulf Bank PJSC and Abu Dhabi Commercial Bank PJSC.
In Saudi Arabia, clothing retailer Fawaz Abdulaziz Alhokair & Co. and bookstore chain Jarir Marketing Co. are among Merrill Lynch's top picks.
Elsewhere in the developing world, the crisis has opened a rift among the BRICs.
"These four countries could hardly be more heterogeneous at this point," says UBS's Issel. He sees continuing turmoil in Brazil, No. 16 in the ranking, and Russia, No. 22, in 2015.
"In Russia, recession is inevitable," he says.
At the same time, investors glow with enthusiasm for the other two BRIC nations.
"We are most excited about the new governments in China and India, who have put reforms in place that will benefit the economy and financial markets in 2015," says Pearlyn Wong, a Singapore-based investment analyst for Switzerland's Bank Julius Baer & Co.
Narendra Modi took over as India's prime minister with a reformist economic agenda on May 26. Since then, the benchmark S&P BSE Sensex stock index was up 16 percent as of Feb. 11.
China's equity market should get a boost in 2015 from the stock-connect program that allows foreign investors to buy mainland shares through the Hong Kong market, says Adam Tejpaul, head of Asian investments at J.P. Morgan Private Bank. China will also benefit from lower energy prices and a dovish monetary policy by the People's Bank of China, which will provide liquidity to the country's markets, Tejpaul says.
"Company fundamentals in the mainland are increasingly positive," says Andrew Gillan, head of Asia (ex-Japan) equities at Henderson Global Investors. "Favored holdings include Baidu, which dominates the Internet search market."
Henderson also likes Brilliance China Automotive Holdings Ltd., a joint venture partner with Bayerische Motoren Werke AG, and Dongfeng Motor Group Co., which has partnerships with Honda Motor Co. and Nissan Motor Co.
China is the world's biggest auto market.
Long-term investors shouldn't be deterred by the current turmoil, Mobius says.
"Three key themes remain in place," he says. "Emerging markets' economic growth rates in general continue to be markedly faster than those of developed markets, emerging markets have much greater foreign reserves than developed markets, and the sovereign-debt-to-GDP ratios of emerging-market countries generally remain much lower than those of developed markets."
Even with major nations like Russia and Brazil hobbled by low commodities prices, scandal and sanctions, Mobius concludes, growth rates -- and share prices -- in developing markets will outpace those in the U.S., Europe and Japan in 2015.
Gulf Nations Defy Oil Rout to Top List of Best Emerging Markets - Bloomberg Business
How about we want a good neigbourhood withou you uncouth ex-emigrants meddling in our backyard?
