Emerging Markets Weaken on Monetary Stimulus Withdrawal Fears
Emerging market equity prices declined appreciably on heightened investor concerns over an early withdrawal of the monetary stimulus measures in the developed world. The most recent policy statement issued by the U.S. Federal Reserve, which was more optimistic about the growth prospects for the U.S. economy, and comments by Fed officials seemed to suggest that the central bank is preparing to wind down its bond purchase program. The prospect of lower capital inflows to the emerging markets negatively affected investor sentiment and most emerging market currencies declined against the U.S. dollar. Investor interest in emerging market bonds have also waned, accentuating the currency volatility. Emerging markets in Latin America were once again the worst affected, as the growth outlook for those economies remains subdued on relatively low industrial commodity prices. In Europe, Turkey saw a significant decline as the political environment remains fluid. Among the Asian markets, Korea and the Philippines weakened the most.
Manufacturing sector output growth data for the month of June was relatively weaker than the earlier months for most emerging economies. Output declined in China, South Korea and Taiwan, while Russia and Mexico were among the major emerging economies to report healthy expansion in factory activity. New export order flows fell in China, Brazil, Indonesia, Mexico, Korea, and Taiwan. Services sector data for June was more positive, as China, India, and Brazil all reported higher output and new orders. Exports from China declined unexpectedly in June, and imports were also lower, suggesting weaker economic activity. Korea and India also saw lower exports in June as global demand remains weak.
Near-term Outlook
Increased liquidity from highly accommodative monetary policies, especially in the U.S., has played a significant part in the performance of emerging market investments in recent years. Hence it is no surprise that the prospect of monetary tightening in the developed economies have made emerging market investors anxious. However, it should be noted that the U.S. economic growth outlook is not robust enough at this point to weather higher interest rates. The housing sector, which is the brightest spot in the U.S. economy, could see slower growth if treasury yields rise further and mortgages become costlier. Higher interest rates could also make the labor market outlook more uncertain, as businesses are likely to delay capacity expansions and hiring. Accordingly, Fed officials have subsequently emphasized that U.S. monetary policy would likely remain highly accommodative for the next couple of years, and withdrawal of monetary stimulus is contingent upon the unemployment rate declining to more comfortable levels.
The International Monetary Fund, while lowering the growth forecasts for the global economy as well as most emerging economies, has also highlighted the risks of a premature withdrawal of stimulus measures until economic trends are healthier. In addition, currency weakness has made imports costlier for most emerging economies, and could fuel inflation risks. As a result, central banks are likely to be more guarded while considering possible monetary easing to support economic growth. The recent gains in international oil prices add to the inflation pressures. Countries where inflation risks are more evident, such as Brazil and Indonesia, have already hiked benchmark rates twice since April this year.
FORWARD LOOKING STATEMENTS
Certain statements made in this article may be forward looking. Actual future results or occurrences may differ significantly from those anticipated in any forward looking statements due to numerous factors. Thomas White International, Ltd. undertakes no responsibility to update publicly or revise any forward looking statements.
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