Indian, Phillipines, Chinese markets impressive in 2006, Pak struggles

One of the most important markets for investors this year has been India. Foreign investors poured in close to 8.5 billion helping to push the index to an all-time high, and deliver US dollar returns of almost 42 per cent. By the end of the year this had left Indian equities also trading at a near record premium of 30 per cent to the region.

According to the Merrill Lynch review earnings growth topped 33 per cent as the booming economy expanded by 8.4 per cent in response to continued infrastructure spending, reasonable corporate investment and a broad pick up in consumption. Inflation remained elevated however, and the central bank continued to push up rates over the course of the year.

After a very strong performance in 2005, equities in Pakistan struggled this year, with the MSCI Pakistan returned just 0.9 per cent in USD terms. The early sell-off in April wiped almost 20 per cent off the value of the local index and sentiment remained nervous as margin trading rules were reviewed over the summer and then the OGDC GDR deal was priced in 4Q06.

Merger and acquisition activity did provide a bright spot in the financial sector with Standard Chartered taking over Union Bank, one of the most aggressive of the consumer players. 8220;Against this backdrop, however, the economy remained relatively strong with growth of 6.6 per cent, under pinned by healthy domestic demand. Inflation remained a persistent concern however, leading to further modest tightening by the monetary authorities,8221; it said about Pakistan8217;s performance.

Despite modest tightening of interest rates, growth remained extremely robust, driven by the twin engines of infrastructure-related spending and consumption. Property prices also continued to rise across much of the region, in particular Singapore, India and China. Buoyant current account surpluses also contributed to a ballooning of forex reserves as most currencies strengthened against the USD. Cash rich corporate balance sheets, coupled with record high capital raising by hedge funds and private equity firms, led to accelerating M038;A activity in sectors such as technology and financials.

However, a deterioration in political stability proved to be a strong negative for markets such as Thailand and Taiwan, both of which barely made double digit returns on the year. Merrill says the year 2006 saw not only record levels on many indices but also record levels of equity and debt issuance. Led by China, the total equity-related issuance for non-Japan Asia topped 161bn, a 33 per cent gain over 2005. Vietnam was the latest frontier market in the region to break upon the radar screens, enjoying a 24-fold increase in market capitalisation and a 100-fold increase in trading volumes at the year8217;s end.

Amongst the developed markets Singapore was the stand-out performer. The MSCI Singapore index gained more than 38 per cent in USD terms with the index easily surpassing the previous all-time high of January 2000. In Hong Kong activity was dominated by the China-related shares, and in particular the H-shares, where there was another record year of equity issuance. The overall MSCI Hong Kong index mildly under performed the region by returning 23 per cent in USD terms.

Japan was a struggle for many equity investors with the MSCI Japan index returning just 4.5 per cent in USD terms. The MSCI China gained 66 per cent in USD as both regional and global investors pursued the secular growth story which showed few signs of any meaningful slowdown.