Monthly Product Commentary: International Equity March 2012
Thomas White International
April 17, 2012
After the robust gains during the first two months of the year, international equity markets corrected marginally during March as the markets waited for further economic data and trends from first quarter earnings announcements. Emerging markets underperformed on renewed concerns that domestic consumption growth in some of the larger emerging economies could be lower than current expectations. The lack of investor interest for a new issue of Spanish bonds drew renewed attention to the European fiscal crisis.
Global factory activity continued to expand in March, but data from the Euro-zone suggested that industrial activity contracted further in the region. The weakness has now spread to the more competitive economies such as Germany, strengthening fears that the region is now facing a mild recession. However, industrial output increased across most emerging economies in Europe as well as the U.K. and Ireland, while services sector activity remained relatively healthy in the region. Spanish and Italian sovereign bond yields have rebounded in recent weeks, highlighting renewed doubts about the ability of these countries to implement deeper fiscal reforms.
The Japanese economic recovery appears to be gaining pace as exports increased in February and industrial output expanded in March. In China, private surveys contradict the official data that showed an increase in March industrial output. The slower than expected inflation for the month of February and weaker retail sales growth in China have led to concerns about a slowdown in domestic demand. Factory output continued to expand in most other emerging economies, though the pace of growth has declined.
Though sovereign bond yields of European countries such as Spain and Italy have gained, showing increased investor anxiety, they remain well below the highs recorded last year. In the meanwhile, Greek yields have declined after the debt restricting effort, and European policymakers continue to seek ways to strengthen and enlarge their financial rescue fund. Liquidity has improved appreciably after the unlimited 3-year funding extended to banks by the European Central Bank, though this infusion has not yet revived the credit flows to the broader economy. Further, the labor market remains weak across the region and recent surveys show declines in the employment indices for both Germany and France. Apart from high unemployment, countries such as Spain also face the challenge of recapitalizing the banks as the industry will likely face increased loan losses if the economy worsens further.
Several of the emerging market currencies, most notably the Brazilian real and the Indian rupee, that saw strong gains at the beginning of this year have corrected in March. While this would likely aid export growth from these countries, imports will turn costlier and heighten inflation risks. This would likely worry most emerging market central banks as their monetary policy flexibility will likely be limited further as the price of imported oil increases.
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