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Emerging Markets

Bulls dismiss warnings of a prolonged slump

Hopes are mounting among financiers that the recent rally in emerging market assets is setting the scene for a bull market in 2010, despite warnings from senior economists of a long and deep global recession.

Mark Mobius, executive chairman at Franklin Templeton Investment, told Emerging Markets on Monday the rally was “sustainable in the long-term”. Mobius predicted markets would remain volatile until the end of the year, but said “the trend will be upwards.

“What’s happening now is we’re building a base for a sustained bull market,” he said on the sidelines of the Asian Development Bank meeting in Bali.

Mobius’ comments were echoed by Asian investors, who have watched equity and credit prices surge in the last two months on renewed optimism for the region’s economy. Hong Kong’s Hang Seng Index jumped 5.5% on Monday to 16,381, up 44% from its March low. Markets in Europe and Japan remained closed for public holidays.

Chia-Liang Lian, emerging markets fund manager at Pimco in Singapore, said: “There are good reasons to be constructive on Asia. It’s underpinned by fundamentals, and technicals have been supportive too. Investors have been long cash since the start of the year, and there’s a huge amount of money to be put to work.”

The credit rally that started in November will continue “for some time”, said Robert Parker, vice chairman of Credit Suisse Asset Management, who advised investors to buy equities “every time markets have a setback” in 2009.

But the confidence in rapid recovery was far from universal. Eisuke Sakakibara, professor at Wasda University and former Japanese vice minister for international affairs, warned that the world was facing a crisis that “resembles that of Japan in the late 1990s”.

Sakakibara said some rebound was “only natural after two quarters of very sharp decline, both in financial markets and in the real economy” – but he predicted that that decline could start again as early as this summer.

He said the world was facing a “balance sheet recession” triggered by a sharp fall in asset prices, similar to the bursting of the Japanese bubble that took the country more than ten years to overcome. “I’m not saying this will be a lost decade for the world, but this recession could not end that quickly,” he said.

That is a devastating indictment of the world’s chances of recovery, raising the question how long the financial markets can continue to rise without signs of economic improvement. “If we’re lucky the recession will end in late 2010 or early 2011,” said Sakakibara.

Morgan Stanley Asia chairman Stephen Roach told Emerging Markets: “This is a multi-year Japanese-like adjustment for the American consumer that is going to draw the export-led economies into a more protracted downturn.”

But Mobius dismissed those concerns, saying it was important to differentiate between the markets and economics. “We all look at economies through a rear view mirror,” he said.

Visit Tantisunthorn, secretary general of Thailand’s Government Pension Fund, sounded a note of caution over the “overhanging uncertainty in the US banking sector”, which he said posed a big threat to rising asset prices.

Lian at Pimco said the rally had been “a little indiscriminate”. The next phase of market activity “has to be for greater differentiation,” he told Emerging Markets.

Sakakibara said the recession was paving the way for a “paradigm shift” as the developed world shifted its consumption away from physical goods and towards services such as healthcare, education and tourism.

“This is the end of 20th century capitalism, or capitalism led by Wall Street,” he said. “The engine for growth will eventually move from the developed to developing economies.”

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