Emerging market earnings at risk

High oil prices dangerous to firms

Vishal Teckchandani

Mon 07 Jul 2008

Financial planners pouring money into emerging markets may be taking a big risk as high inflation has threatened to damage companies' earnings, according to State Street Global Markets (SSGM).

"Inflation threatens to spiral out of control in some emerging markets and valuations are historically high," an SSGM report said.

"Worse, just as investors were beginning to discount the effects of the credit crunch and poor economic news, the price of oil has once more started to grab headlines."

The price of crude oil surpassed a record US$145 a barrel on July 3, according to data from the New York Mercantile Exchange.

"This is not an oil price shock of the magnitude of 1973, when prices quadrupled, but its timing given the macro backdrop could scarcely be worse," the SSGM report said.

China's CSI 300 Index has slumped 53 per cent to 2760 points as of July 4 since its record high of 5877 points last October.

The government raised interest rates and ordered banks to curb lending as inflation food prices surged 23 per cent.

Vietnam's Ho Chi Minh Stock Index crashed 61 per cent to 430 points as of July 4 after its best ever close of 1106 points last November as the country's inflation spiralled to 26.8 per cent.

Investors risk appetite had changed since the US sub-prime collapse started last August, according to the SSGM report.

Investors had fled to developed market stocks after dumping emerging markets companies and general growth shares.

Major US and European markets had fallen around 20 per cent since November last year. Australia's S&P/ASX 200 had fallen around 26 per cent since its record set last November.