IU: Don't all markets face these same problems in varying degrees?

Hoguet: Yes, but it's a very broad dispersion. Some countries are much more dependent on commodities and natural resources, for example. China, with its large foreign exchange reserves, is in a better relative position than a country like Turkey. It runs a substantial current accounts deficit and its corporations are major borrowers on external markets. So if they can't obtain financing or if so, on unfavorable terms, they could face rollover risk. But those are just two examples. It can vary from country to country a lot.

IU: So you think correlations tightening between emerging and developed markets is a short-term occurrence?

Hoguet: I wouldn't put it that way. There are two trends at work. The first is a secular, long-term trend which is based on the fact that in general, investors are holding more diversified portfolios. That's reducing home biases, and emerging market companies are becoming more integrated into the world. The second factor is cyclical. We're seeing a deleveraging take place and a shock in the U.S. that led to a significant drop in the U.S. stock market last year. Investors have been lowering their risks and selling emerging markets. In the current environment, these two factors have led to increased correlations.

What I'm trying to suggest is that in the very long term, as China becomes the second-largest economy in the world, global business cycles won't be as synchronized. Right now, we've got a synchronized slowdown in markets across the world. That's forcing correlations to become much tighter.

IU: This year, what trends do you see?

Hoguet: The returns are extremely tied to progress in the world economies. For emerging markets to rally on a sustained basis, investors need to see significant progress towards normalization in credit markets. Right now, we're still on a downward path, as growth continues to disappoint. Investors will have to also see a reduction in volatility.

IU: How can individual investors monitor those factors?

Hoguet: What they should look at is volatility in developed equity markets, which likely will have to fall before anything happens in emerging markets. The consensus is that the U.S. economy will start to recover by the third quarter of 2009. But risks are to the downside. And there's a question mark to the path this year of the Chinese economy.

IU: What challenges does China face in coming quarters?

Hoguet: The question is how much growth will slow in China and how much its exports to the U.S. and the rest of the world will be offset by domestic demand. Chinese GDP growth below 6% would signal a sharp enough slowdown to further reduce the world's rate of growth. My feeling is that by the end of the year, emerging markets are likely to finish higher. My reasoning is that credit markets will have stabilized and improved enough to support growth and that the world economy will no longer be on a downward path.

1 | 2 |