As we anticipated, the Asian and Latin American markets have led the recovery in global equity markets thus far this year. The MSCI Asia Emerging Market Index is up 38.4% year-to-date (June 5), while the MSCI Latin American Emerging Market Index is up 47.8%. The large economies of China (up 36.2%) and India (up 66.5%) in the case of Asia, and Brazil (up 62.7%) in Latin America are the locomotives behind these advances. There are several smaller markets in these two regions that have also provided good opportunities to add value to portfolios. In this note we look at two of our favorites that offer sound prospects for both the near and longer term, Chile and Singapore.

The Chilean economy is poised for a period of outperformance, with high productivity growth due to strong investment, together with healthy growth in a relatively well-educated labor force. Unlike just about all other emerging markets, Chile has a deep and liquid domestic bond market that operates in a sound financial regulatory system. This has helped offset the negative effects of the global financial crisis that hit Chile’s banking system, in which foreign-controlled banks account for almost half of domestic credit.

We are particularly impressed with Chile’s record of sound financial and economic policies. After building up substantial savings in the prior period of surging copper prices (Chile is the world’s largest producer of copper), paying down its foreign debt and becoming a net creditor, Chile has been able to mount a stimulus package that is massive relative to the size of its economy.  Chile’s central bank, arguably the best in the region, has also moved aggressively, cutting interest rates from 8.25% to 1.25% over the last six months. These policy moves should help the Chilean economy recover more rapidly than others in the region.

A sharp recovery in the world market for copper is another positive factor for the Chilean economy. Since early March copper prices have risen some 46%, driven by the economic recovery and stock-building in China and an improving outlook for the global economy. In the iShares MSCI Chile Investible Market Index ETF, ECH, materials have a weight of 19.5%, second only to utilities (31.1%).  The MSCI Chile Index, tracked by ECH, is up by 47.1% year-to-date.

The small island state of Singapore, on the other side of the Pacific, is not a commodity exporter.  It does, however, share an important characteristic (other than small size) with Chile, that is, a solid record of sound economic and financial policies. This year Singapore’s policy makers are being put to the test, as its economy, heavily dependent on exports, has been one of the hardest hit by the credit crisis. It is experiencing its deepest recession since 1965. In the first quarter of this year, the economy shrank by 10.1% from a year ago, which was a little better than the 11.5% drop Singapore officials forecast in April.

Thanks to ample reserves, the government has been able to mount a substantial US$13.7 billion “resilience package” that includes measures to enhance business cash flow and further improve Singapore’s already high competitiveness.  The corporate tax rate has been reduced to 17% (from 18%), to take effect in the 2010 assessment year. The top personal tax rate is only 20%. The Monetary Authority of Singapore in April adjusted the trading band of the Singapore dollar to the prevailing nominal effective exchange rate, allowing for a weakening of that currency.

There are signs that the worst may be over for the Singapore economy. Industrial production fell only 0.5% in April following a 32.8% plunge in March. Singapore’s purchasing managers index (PMI) for May showed manufacturing increasing for the first time in eight months. The index has climbed steadily, from 47.1 in March to 49.2% in April and then to 51.2% in May. There was an expansion in May of overall new orders and of new export orders.

Singapore’s economy is set to benefit strongly from the economic recovery elsewhere in Asia. Its top three export markets are Malaysia, Hong Kong, and China, with the United States only in fourth place, accounting for 7% of Singapore’s exports in 2008. While the GDP growth figure for the year will likely show a decline of 4%, this masks an expected solid rebound in the second half. Growth in 2010 is projected at a healthy +4%.

The iShares MSCI Singapore Index ETF, EWS, is heavily weighted towards the financial sector (47.3%), with industrials in second place at 23.7%. The top four holdings are Singapore Telecommunications, DBS Group Holdings (originally the Development Bank of Singapore), United Overseas Bank LTD, and Overseas-Chinese Banking Corp.  The MSCI Singapore Index, which is tracked by EWS, is up 34.9% year-to-date., which is pretty impressive in view of the depth of the recession in the first quarter.

There are many factors that affect the relative performance of national equity markets, and they can change frequently.  The sustained sound, market-friendly economic and financial policies and regulations, together with political stability and good governance, that are found in both Chile and Singapore are considerations we weigh heavily in our investment strategies for our International, Emerging Market, and Global Multi-Asset Class Portfolios.