Emerging Markets Equity Commentary – September 2013
Equity prices recover, but economic data trends remain subdued
Emerging market equity prices saw a robust recovery in September as investor concerns about slower capital inflows to these markets faded after the U.S. Federal Reserve unexpectedly decided to delay the tapering of bond purchases. The government shutdown and the political standoff over raising the debt ceiling have also dimmed the U.S. economic outlook for the current quarter, strengthening hopes that the Fed would sustain its bond purchases at the current level for the rest of this year. Emerging market currencies also stabilized during the month, after the previous month’s steep decline seen in select currencies, and helped rebuild investor confidence. Among the major emerging markets, Turkey, Brazil, Russia, and India were the best performers for the month while Indonesia was the only market which saw a price decline.
Economic data trends from most emerging economies remained mostly subdued, continuing the trend from previous months, prompting the IMF and the World Bank to lower the current year growth forecasts for the emerging world. External trade data from the Asian countries was weaker than the previous month as China and Korea saw a decline in total shipment value. However, export trends remained positive for India, Thailand, and Indonesia. Despite the weaker export growth towards the end of the quarter, the Chinese economy expanded at a faster than expected 7.8 percent during the July-September period. Manufacturing activity was also relatively subdued across most emerging economies, especially when compared to the developed world which is seeing acceleration.
Near-Term Outlook
While the outlook for emerging market economic growth remains relatively muted when compared to last year, recent data trends suggest that the slowdown may not be as severe as feared. Chinese economic growth for the third quarter was robust, when seen in the context of the current global environment. Demand growth in the developed world continues to be restrained, limiting the potential for export growth from emerging countries. Europe is gradually climbing out of a recession while Japan appears to have succeeded in stimulating its economy through extraordinary policy measures, after a long period of subpar growth and deflation. Meanwhile in the U.S., some of the optimism has been offset by the expected fallout from the government shutdown. Further improvement in these economies could have a positive effect on the export prospects of China and other countries.
Global commodities demand is also seeing a moderate recovery, especially for industrial materials such as iron ore, though the average prices remain well below the historic highs. Nevertheless, volume growth and the improvement in realizations could benefit resource exporting countries such as Brazil, South Africa, and Indonesia. Improved export growth could also help narrow the current account deficit for select countries, one of the biggest investor concerns this year. At the same time, inflation risks are likely to remain elevated and force central banks to remain cautious. Constraints on monetary policy and the reluctance to roll out fiscal stimulus measures, on fears of fueling excessive asset price increases, are likely to restrain domestic demand growth in several emerging countries.
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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