Emerging Markets Equity --
Monthly Product Commentary: October 2012
Thomas White International
November 20, 2012
Economic data from major emerging markets suggested a moderate reversal from the weak trends of recent months.
Emerging market equities saw a marginal correction in October, after the previous month’s strong gains, as markets digested the after effects of the extraordinary monetary measures announced by the U.S. Federal Reserve and the European Central Bank in September. Investors also awaited the results of the U.S. presidential elections and further progress in negotiations among European leaders to forge a closer banking and fiscal union in the region. At the same time, there are apprehensions about sharp political divisions in the U.S. that might make it difficult to arrive at an agreement to prevent a fiscal cliff early next year. Select emerging markets in Eastern Europe that saw strong gains during the previous month underperformed in October, while Turkey rallied further. In Asia, Taiwan, India, and Korea declined while China ended with healthy gains.
Economic data from major emerging markets suggested a moderate reversal from the weak trends of recent months. Manufacturing output expanded in China after declining for most of the third quarter and the trend improved in Brazil, though output continues to decline in that country. Among other major emerging countries, India, Indonesia, Mexico, and Turkey continued to see gains in factory output. Korea recorded an export gain in October, after consistent declines during the third quarter, while exports from China also increased for the second successive month. Meanwhile, GDP growth in Indonesia during the third quarter was healthy on robust domestic spending and investments. Brazil and Korea lowered their benchmark interest rates further in October, while the central bank in India eased the reserve requirements for banks.
The significant slowdown in export demand, especially from Europe, has been the primary reason for the moderation in economic growth outlook for the emerging economies. Though domestic demand has been buoyant in most emerging countries, it has so far been insufficient to offset the slowdown in export growth. However, trade data over the last two months suggest that exports from some countries such as China and Korea are seeing a measured rebound. Though demand remains weak in Europe, consumer spending in other developed markets such as the U.S. continues to be relatively healthy. Unless policymakers fail to avoid the fiscal cliff that willresult in tax hikes and lower government spending, U.S. domestic consumption is expected to maintain the current pace of expansion. This will help emerging market exporters, especially China and Mexico. However, it may take longer for resource exporters such as Brazil and South Africa to see a rebound in external demand.
Despite the subdued global economic outlook, investment inflows to emerging markets are expanding at a vigorous pace. While the positive interest rate differentials, despite the rate cuts since the second half of last year, continue to keep emerging market debt attractive to investors, portfolio investment flows into emerging market equities have also rebounded since the second half of this year. Even more positive is the growth in foreign industrial investments in emerging countries. Recent studies suggest that total investment inflows into emerging countries will exceed $1 trillion this year as well as in 2013, and industrial investments will account for more than half of the total. Apart from job creation, long-term industrial investments often bring in better technology and management practices that help enhance the competitiveness of therecipient countries.
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