Unclear market picture in 2009

The economic crisis is the result of an escalating imbalance among the global economic players, with “indebted consumers” on one side (mainly the USA and UK), and global producers on the other side (driven by China), according to Enzo Puntillo, manager of the Julius Baer Absolute Return Emerging Bond Fund.

“The correction of this imbalance will not be painless. Weaker consumption and household deleveraging in the developed countries will have a direct negative impact on GDP. “There will also be an indirect impact on the growth of emerging markets as demand for their exports slows and foreign investors become less willing to invest capital in these countries,” continues Puntillo.

In this challenging environment, some emerging market countries will be better positioned than others. Fiscal sustainability, effectiveness of monetary policy and external vulnerability are the key dimensions to assess a country’s solidity.
On this basis, he believes that the greatest vulnerability is in Eastern Europe, especially the Baltic regions, where the high level of private debt and strong dependence of their capital account on international financing are major concerns.
Puntillo views the situation in Asia as mixed. “Asian countries were able to accumulate a significant amount of reserves in recent years, a very positive factor. But going forward their current account balances will be seriously challenged by the global rebalancing.

“In Latin America the picture is generally positive. Countries like Peru, Colombia and Brazil entered the current crisis with sound public balance sheets and no major external vulnerabilities.”

When investing in emerging market currencies and bonds the key to success is a fund manager’s ability to distinguish between promising and vulnerable countries, and to identify and exploit high volatility and valuation errors, Puntillo concludes.