In a post yesterday on Real Money, my colleague Jim Cramer noted that despite massive sell-offs in equity markets in Brazil and India, he wasn’t yet seeing any real weakness in the fundamentals for either economy. I think Jim’s comments probably go beyond Brazil and India to include most other emerging markets.
Of course, a financial contagion could easily lead to deterioration in emerging market economies, so Jim’s comments should probably include a big “so far” qualifier. Among other things, growth in these economies is being driven by cheap capital. Collapsing equity markets could halt or significantly raise the price of the capital inflow which undermines economic growth and recent currency strength (I still take comfort in the much more stable action in emerging market currencies relative to emerging market stocks).
My almost five year old position in Central European Media Enterprises (CETV) has led me to focus mostly on emerging markets in Central and Eastern Europe. These economies are being driven by low cost labor and infrastructure, increased political stability, new regulatory and legal laws, non-intrusive tax systems, and rapidly growing consumer economies. A stock market meltdown could undermine some of these trends but I think they will prove durable.
In support of Jim’s contention that economic fundamentals look a lot better than recent stock market action, I pulled the following excerpts from a recap of an investment conference that Dragon Capital recently held for leading companies in Ukraine. Dragon is the largest broker in Ukraine according to their own press releases….

• Ukraine finished 2005 as Europe’s 12th largest and fastest growing market by car sales (25% y-o-y). Based on April statistics, the country advanced to ninth place. In 1Q06, domestic car output rose by 35% y-o-y, to 54,900. vehicles, and total car sales surged by 45% y-o-y, to 67,700 vehicles. Full-year car sales are projected at 330,000 vehicles. Russian VAZ, Ukrainian ZAZ and South Korean models (Daewoo and Chevrolet) remained the most popular car brands in Ukraine in 1Q06, accounting for 65% of new car sales over the period.
• Ukraine’s banking sector is among the fastest growing in Europe and is expected to catch up with Poland’s current market level in 5-6 years, implying an up to ten-fold consumer lending increase in the next five years. Ukraine’s mortgage market more than tripled in 2005, to USD 2.1 billion, growing by 140% p.a. in 2002-2005, driven by political stabilization, creation of a proper regulatory base, strong personal income growth (20% CAGR in 2004-05), real estate price growth (30-50% p.a. in 2004-2005), and declining mortgage interest rates (from 15.0% to nearly 12.0% in 2005) on higher competition and lower deposit rates.
• Despite robust lending growth, Khreschatyk (a leading bank in Ukraine) boasts outstanding loan portfolio quality and the sector lowest non-performing loan rate of just 0.3% of the 2005 loan portfolio
• Shostka expects its full-year sales to remain higher y-o-y. The company’s mid-term plans call for increasing semi-hard cheese production capacity by 40% in 2007-2008, introducing new higher margin semi-hard cheeses, and raising the volume and variety of small packs sold, to be supported by a nationwide advertising/brand-building campaign.
• With Ukraine’s total advertising market forecast to grow from just over USD 500 mil. in 2005 to about USD 1.2 billion in 2008, KP Media plans to accelerate its growth by aggressively expanding regionally with existing titles and launching new publications in order to solidify its leading market position. The company also plans to offer new web resources to extend its reach for the Internet audience.
• Sablink is looking to raise USD 48 million to acquire 600 ha of agricultural land within 18 km of the Kyiv city. Upon the purchase and conversion of the land to a residential construction site, the transaction manager will either sell it to property developing companies to exploit “conversion arbitrage” or will hire property developers to build a suburban cottage village and capitalize on growing demand for out-of-city houses.
• Modeled after VK’s existing successful malls, the development company plans to build over 230,000 square meters of modern shopping and entertainment space in eight locations over 2006-2008. VK’s supermarkets and hypermarkets are expected to be the malls’ key anchor tenants, while competing for properties and leasing them at market rates.
• MTI is Ukraine’s leading shoe retailer and exclusive domestic distributor of international brands such as Ecco, Lloyd, Clarks, Bally, Camel Active and many others. The company operated 37 shoe stores and three luxury menswear stores (Ermenegildo Zegna) nationwide as of May 2006.
I suspect that similar comments could be found about many emerging markets. The point is not to downplay the ramifications of the recent collapse in many emerging market stock indices. Rather, it is a reminder that sometimes stock prices do their own thing and that a financial panic doesn’t always lead to an economic shock.