Emerging markets tipped to reign in 2008

Political turmoil in Pakistan and Kenya has shaken investor confidence but experts predict emerging markets will still lead the way in 2008.

GROWTH: In China the Shanghai stock market grew by almost 100% in 2007.

While the developed economies of the world grappled with the turmoil brought on by the credit crunch in the second half of last year, emerging markets carried on rising.

For example, in China the Shanghai stock market grew by almost 100% while the FTSE 100 index rose by a more modest 7.36%. The best performing fund of 2008 was Gartmore China Opportunities, which posted growth of more than 60% over the year.

However in the opening days of 2008, trouble in Pakistan and Kenya, reminded investors once again just how volatile the emerging markets of the world can be. Pakistan's stock market dived on New Year's Eve - the first day of trading since the assassination of former Prime Minister Benazir Bhutto.

The Karachi Stock Exchange 100-share index fell by the 5% limit allowed under trading rules, shedding 689.72 points to 14,082.36. However the market is up by 40% over the past 12 months.

Later in the week in Chicago the oil price touched $100-a-barrel for the first time while gold reached an all time high of $860-an-ounce.

The geopolitical tensions – assassination in Pakistan, a disputed election in Kenya alongside tension in Northern Iraq and attacks on oil production facilities in the Niger Delta were all driving factors in pushing up the price of gold and oil.

Graham Birch, head of BlackRock's natural resources team and manager of the Gold and General fund says: 'On the supply side, production from the worlds' gold mines continued to decline and we believe it would take a significant further rise in the gold price to reverse this particular trend.

'Although in the short term jewellery demand may suffer some price related weakness, the long term outlook remains bright with emerging market wealth trends especially favourable.

'So, for 2008 we anticipate that the market patterns inherited from 07 will remain in place. While gold rarely goes up in a straight line the general tenor of the market seems likely to remain favourable.'

Gold's previous high of $850 an ounce was reached in 1980 when inflation got out of control, notably back then the world was not a happy place either – there was the Soviet intervention in Afghanistan and there was also the Iranian revolution to contend with.

But some experts say potential investors getting excited about the prospects for both oil and gold should maybe exercise some restraint, at least for now as the two most politicised of commodities could cool later in the year.

ustin Urquhart Stewart of Seven Investment Management says: 'When the phrase “all time high” is used people in their masses jump onboard forgetting about the simple rule of buying high and selling low and over the medium term the global economy is slowing, the US could go into a recession. Now would be exactly the wrong time to buy. Wait until later in 2008 and commodities may come off their current levels.'

The infrastructure and commodities themes will be intertwined as emerging markets continue to evolve over the coming decades and BlackRock continue to expect emerging markets to do better than developed markets in 2008, albeit by a smaller margin than in recent years.

The group notes however that political risk still exists but says that as long as investors have a well diversified emerging markets portfolio it should not be a reason to shun these types of shares.