Emerging market equity prices were subdued for the second successive month in April as renewed concerns over the European fiscal crisis dulled the outlook for exports from some of the leading emerging economies. The moderate correction in energy and other commodity prices also dampened the optimism over economic growth in some of the leading resource exporting countries. Among the major emerging markets, Brazil declined the most followed by India and Taiwan. Most emerging markets in Europe also underperformed during the month. China, Thailand, and the Philippines, as well as select Latin American markets such as Colombia and Peru, outperformed during the month.

Industrial output continued to expand in most emerging economies in April, and the pace of growth accelerated in China and India. However, several economies in Eastern Europe reported slower growth in factory output and new orders. The Korean economy maintained a healthy pace of growth during the first quarter, but exports from the country declined for the second successive month in April. After two successive quarters of declines, the Taiwanese economy recovered during the first quarter. To counter the slowdown, the Brazilian central bank cut interest rates again and indicated further rate cuts later this year. India surprised with a larger than expected rate cut, but exports from the country declined in March for the first time in more than two years. Meanwhile, credit rating agency S&P lowered its rating outlook for India from stable to negative, and for Turkey from positive to stable.

Near-term Outlook

Most developed economies in Europe are facing a mild recession and even the relatively stronger economies such as Germany are now seeing slower domestic demand growth. Accordingly, several emerging economies that count Europe as one of their major export markets are likely to see restricted export growth this year. The emerging economies in Eastern Europe that are major suppliers of industrial components and material to Germany and other developed countries in the region will likely be the most affected. Even the large emerging economies such as China have also seen weaker export demand from Europe in recent months. However, further declines in emerging market currencies may shield exports from these countries to some extent. For instance, the Brazilian real and the Indian rupee are currently at their lowest levels against the U.S. dollar this year.

Emerging market debt is finding increased favor among investors, despite the increased global risks that stem from the European fiscal crisis. The JP Morgan EMBI Global Index, the benchmark for emerging market debt, has scaled record highs this year as average yields have declined. This trend will likely allow governments and corporations in the emerging countries to borrow more from international markets and sustain the higher public spending and investments.

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