Emerging Markets Weekly

The global credit crisis has taken its toll on economies of both developed and emerging markets, but the cost to fixing the financial systems of the developed world are destined to result in a major increase in gross debt to GDP for the advanced world economies. In contrast emerging markets are facing a lower expansion in budget deficits, higher growth trajectories, and falling ratios of debt to GDP.

China for example will incur a budget deficit of only 2.2 percent in 2009 despite a massive spending program aimed at boosting growth next year, and China is expected to see its economy grow over 6.5% in 2009 according to the IMF. The US in contrast is expected to produce a yawning fiscal deficit of 12% of GDP in 2009. Despite the massive spending increase, the US economy will contract in 2009.

More generally, the developed world economies will see large fiscal deficits in 2009 and 2010. The G-20 advanced economies are expected to see fiscal deficits of 7.9% and 6.8% this year and next. These Keynesian style spending initiatives will debt to GDP ratios in excess of 100% over the long term.

In contrast, the emerging markets will see falling debt to GDP ratios over the long term despite the global recession. The encouraging result here is attributed to the higher rates of economic growth across the emerging markets which will allow the emerging markets to grow their way out of rising fiscal deficits.

Emerging Markets Weekly

Excel Income & Growth Fund* is one of the only balanced funds in Canada with a focus on emerging market equities and debt. One of the more interesting aspects of the portfolio is the sizable holdings of Reserve Bank of India Treasury Bills valued at roughly 20% of fund assets.

These short term debt instruments offer investors a sizeable yield pick-up over comparable T-bills in Canada and the U.S. For example, the current rate of interest on the T-bill portfolio is roughly 9.14%. This represents a significant yield pickup for investors, considering the current 0.64% rate of interest on 1-year T-bills in Canada.

Investors unsure of where to invest in the near term can take advantage of the yield pickup on the t-bill portion of the portfolio which provides an important component for managing overall portfolio risk.

Over the long term, Excel Funds has positioned the Excel Income & Growth Fund to take advantage of the higher growth opportunities in the emerging markets.

For investors looking for a less risky approach to emerging markets, this first quartile ranked Fund is ideal and presents an excellent alternative to traditional balanced funds that are invested in low-yielding government bonds in Canada and the U.S.

Emerging Markets Weekly

To offset the global economic recession, governments around the world are partaking in Keynesian style deficit spending programs. The US and China are most noteworthy for the size of their plans, the US approving US$787-billion in spending over two years and China planning to spend US$586-billion over the same timeframe. While the US stimulus package is highest in absolute dollars, the market is reacting favorably to China's plan, pushing stock prices up in China and dumping US equities in response to the efforts of the US administration.

China's Stimulus Package will cover approximately 0.4% GDP in 2008, 2% GDP in 2009, 2% GDP in 2010, totalling 4.4% of GDP (at purchasing power parity) putting it on par with the U.S. stimulus in terms of size relative to economic output. Stimulus expenditures include infrastructure investment, safety nets, housing/construction support, strategic industries support, and other expenses.

Yet despite the similarities, the market has reacted favourably to China's stimulus package in contrast to the experience in the US for very good reasons. China's economy continues to grow and its banking sector remains well capitalized. Therefore, the opportunity for stimulus to lead at a quicker economic recovery is more pronounced, not to mention the fact that China could quite possibly achieve 8% GDP growth for 2009 while a contraction in US GDP is a foregone conclusion.

China also has more room to increase fiscal stimulus over the next two or three years. China's level of public debt will rise to only 22.2% of GDP according to IMF estimates leaving China the least indebted nation partaking in deficit spending.

Investors should expect China to lead the global economy out of economic recession as a result. The outlook for the US economy remains subpar for as long as the next decade as the economy is forced to undergo a stifling debt workout. In contrast, China's economy could see strong recovery in 2010 and the stock market could react accordingly.

Emerging Markets Weekly

Stocks in Russia are now dirt cheap and oil and gas producers are priced more cheaply than anywhere else in the world.

Share prices of three of the biggest energy producers in Russia -- Gazprom, Rosneft and Lukoil -- are down by roughly three-quarters or more from their 52-week highs. These three companies figure most prominently in Excel Emerging Europe fund accounting for roughly 30% of fund assets.

Capital flight has put a serious damper on capital spending plans and reduces the outlook for production over the next few years. However, these companies look very cheap on a historical earnings basis.

State-controlled Gazprom is trading at two times 2008 earnings according to Thomson Reuters. Rosneft is trading at three times earnings and Lukoil is trading at just over two times earnings from last year. The market is dirt cheap and offers investors access to the world's largest gas reserves in the world not to mention a very large stream of global oil production.

Investors have sold out of Russia due to a one-way bet on ruble devaluation after the bank took the currency down stepwise in 20 mini-devaluations since last August. The currency is off by roughly 30% versus the U. S. dollar over the past six months but is stabilizing and may be forming a bottom here.

The decision by authorities to defend a slow depreciation of the ruble in the face of capital flight caused investors, even domestic ones, to sell out of Russia to avoid currency losses thus exacerbating the capital flight. This process also caused a slow bloodletting of the country's foreign exchange reserves, which fell by roughly 35% or US $200-billion.

The currency has stabilized in recent weeks and the central bank has successfully defended the lower value it has set for the ruble, although futures markets are still predicting an 18% decline this year.

At this point, investors may want to look to Russia and its highly cheap energy assets and buy in very cheaply for long run expected appreciation.