Emerging Markets Equity Product Commentary February 2012
Thomas White International
March 19, 2012
Emerging markets in Europe and the Middle East continue to lead
The renewed market optimism that surfaced towards the end of last year persisted in February as well, as emerging market equities again outperformed the developed markets, but by a smaller margin when compared to the previous month. Though GDP growth forecasts for most emerging economies have been scaled lower for the current year and for 2013, it is widely expected that the risk of a further slowdown in economic activity is limited. Emerging markets in Europe and the Middle East continued to lead during the month, followed by Asia and Latin America. Egypt sustained its recovery during the month while Thailand, Russia, and Chile also outperformed.
Still, weaker than expected fourth quarter economic growth and other trends have led to a downward revision of current year growth forecasts for the large emerging economies. Fourth quarter GDP growth for India, Brazil, and South Africa announced during February were slightly below forecasts, while the early estimate for Russia is above expectations. Nevertheless, manufacturing activity continues to expand in most emerging countries, with activity gaining pace in China and Taiwan, while new order gains also remain healthy. Recent export data from China, Korea, and India showed gains, despite the weak demand in Europe.
Higher oil prices have become one of the biggest economic risks across the globe, as prices have reacted to the increased risks of a conflict over Iran’s nuclear program that threaten to disrupt oil supplies from the Middle East. The crude oil price gains might not immediately translate to higher pump prices in several emerging countries that subsidize fuel prices. However, fiscal constraints may force some of these countries, such as India, to adjust the pump prices higher. This may trigger renewed inflation concerns that had eased in recent months. Nevertheless, current trends show that inflation risks are contained in most emerging economies. Accordingly, central banks have made further interest rate cuts or have lowered the reserve requirements for commercial banks.
Relatively subdued external demand and domestic structural bottlenecks that accentuate inflation risks have led to reduced growth expectations in most emerging economies, when compared to their pre-2008 growth rates. The Chinese government has lowered its official medium term growth target to 7.5 percent, from the 8 percent that it had maintained for the past several years. India’s central bank has warned that the economy cannot sustain growth above 7 percent without triggering inflation. Slower growth in China will likely restrict demand for commodities and negatively affect growth expectations for large resource exporters such as Brazil, South Africa, and Russia. Nevertheless, average growth rates for the emerging economies as a group are likely to be significantly higher than the developed world.
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