(Bloomberg, Sept 29, 2006) -- Emerging stock markets rebounded in the third quarter from the steepest drop since 2002 as investors anticipated that domestic economic growth would fuel demand for consumer goods.

Standouts in the quarter, including China Mobile Ltd. and Wal-Mart de Mexico SA, may extend the gains because incomes are rising at a faster pace in developing countries than in the U.S., the world's largest economy. China and India are the world's two fastest-growing major economies.

``We're in a sweet spot as far as I'm concerned,'' said Mark Mobius, who manages $30 billion in emerging-market equities at Templeton Asset Management Ltd. in Singapore. ``Economic growth in these countries is very good.''

The Morgan Stanley Capital International Emerging Market Index, a dollar-denominated measure of 25 countries in Asia, Latin America, Eastern Europe, the Middle East and Africa, added 4.4 percent this quarter. The index had its eighth advance in nine quarters.

During the second quarter, the emerging-market index fell 5.1 percent. The decline resulted from a 25 percent plunge from May 9 through June 13, the biggest for any time period since October 2002.

Funds investing in emerging-market stocks had net outflows of $1.6 billion this quarter, according to Brad Durham, a managing director at Boston-based Emerging Portfolio Fund Research, which tracks 15,000 funds with $7 trillion in assets. U.S. equity funds suffered outflows of $6.8 billion, Durham said in a telephone interview from Boston.

IMF Forecast

The U.S. expansion will slow as a cooling housing market curbs consumer spending in the world's largest economy, the International Monetary Fund said this month. Prices of existing homes in the U.S. fell last month for the first time in 11 years and sales slipped to the lowest level since early 2004, according to the National Association of Realtors.

The IMF on Sept. 14 cut its 2007 growth forecast for the U.S. to 2.9 percent from 3.3 percent, the weakest since 2003.

China's economy will expand 10 percent in 2006, its fourth straight year of double-digit growth, according to the IMF. The IMF raised its forecast for India to 8.3 percent this year, from a 7.3 percent estimate in April. The Indian economy grew 8.5 percent in 2005.

``The view that we will see a slowdown in the U.S. economy seems to be increasing,'' said Parameswara Krishnan, who manages $150 million at DNB Nor Asset Management in Chennai, India. ``If we see that happening, countries that have a buoyant, domestic- driven economy may actually be safer bets.''

China Mobile, the world's biggest cell-phone operator by market value, gained 24 percent this quarter, while Wal-Mart de Mexico, Latin America's No. 1 retailer, rose 20 percent.

Asian Recovery

Asia outside of Japan, MSCI's largest emerging-market region, climbed 4.8 percent this quarter. Demand from China and India, the world's two most populous countries, and the resurgence of growth in Japan, the world's second-largest economy, helped support profits and share prices in Asia.

Salaries in China and India will jump an average 7.2 percent next year while U.S. wages grow 3.6 percent, a survey by Mercer Human Resources Consulting showed. Assets held by the rich in Brazil, Russia, India and China will rise 71 percent to $4.8 trillion by 2010, Boston Consulting Group said last week.

An MSCI index that tracks Eastern Europe, the Middle East and Africa climbed 1 percent, while a Latin American index added 3.6 percent.

Egypt's CASE 30 Index surged 36 percent, the world's best performer this quarter. Shares of United Housing & Development, an Egyptian construction company, more than doubled.

`Lucky in Egypt'

``We're lucky in Egypt,'' said Angus Blair, head of research at Beltone Financial, a Cairo-based investment company that manages more than $2 billion. ``We have more institutional investors who value fundamentals and are not speculative, unlike retail investors in the Persian Gulf.''

Middle Eastern stocks slumped along with other emerging markets in the second quarter as the prospect of higher interest rates around the world prompted investors to shun riskier assets. Gulf markets added to the slump this quarter as oil prices fell.

Saudi Arabia's Tadawul Stock Index tumbled 15 percent, the worst performer among 80 indexes ranked by Bloomberg. It plunged 23 percent in the second quarter. Saudi Basic Industries Corp., the largest publicly traded company in the Middle East, led declines, slumping 25 percent this quarter.

In Russia, stocks advanced for a seventh straight quarter, boosting the value of publicly traded companies to almost $1 trillion -- a milestone never reached by an emerging market. OAO RBC Information Systems, a Russian media company, was among the top performers, jumping 52 percent in the quarter.

Oil Tumbles

A drop in oil prices limited gains. Shares of OAO Gazprom, Russia's natural gas monopoly, added 3.3 percent this quarter after a 24 percent rally in the first half. OAO Lukoil, Russia's largest oil producer, slid 7.8 percent this quarter.

Oil futures in New York have fallen 18 percent from the record $78.40 reached on July 14. The November contract last traded at $63.95 a barrel.

``The oil and gas sector has been a very significant part of the Russian market,'' said Angelika Millendorfer, who helps manage about $3.4 billion in emerging European and Asian stocks at Raiffeisen Capital Management in Vienna, with about half of the funds in Russian equities. ``There may be some selloff'' in shares if oil prices fall further.

Shares of companies that produce raw materials, among the leaders in the first and second quarters, became laggards as metals prices plunged. Gold Fields Ltd., one of South Africa's biggest gold companies, and Brazil-based Cia. Vale do Rio Doce, the world's largest iron-ore producer, lost 13 percent and 11 percent this quarter, respectively.

Worst Quarter

Commodity markets had their worst quarter since 1956, as measured by the Reuters-Jefferies CRB Index. The index is down 12 percent since the end of June and is set for its biggest drop ever since the index was tracked by Bloomberg.

What's negative for commodity producers in Latin America, Russia, the Middle East and Africa is a boon to Asia, a major commodity user. China is the world's biggest oil consumer after the U.S.

``Asia ex-Japan should outperform in the global emerging market universe on a downtrend in global commodity prices,'' Eddie Wong, ABN Amro Holding NV's Hong Kong-based chief Asian strategist said in a note to clients dated Sept. 18.

Source:Bloomberg
tag:energy