Emerging Markets Equity Commentary: October 2014
November 24, 2014
of Thomas White International
Improved U.S. Consumer Spending to Help Exporters of Manufactured Goods
Emerging market equity prices turned volatile during October as concerns about weak global growth and the impending close of bond purchases by the U.S. Federal Reserve unnerved investors. Still, some of the large emerging markets in Asia rebounded strongly during the second half of the month. China, India and Taiwan ended the month with healthy price gains, and helped the emerging markets to outpace the developed markets. Outside Asia, Turkey and South Africa rallied strongly on expectations that improved political stability would help revive their respective economies. In Brazil, markets were disappointed by the reelection of President Rousseff, as expectations of an actively pro-business government have faded. Most markets in Eastern Europe continued to decline with the perception that the weak Euro-zone growth could hurt export demand. Latin American markets also slipped further as commodity prices remained weak.
Chinese GDP growth for the third quarter was marginally above expectations and boosted prospects that the economy is stabilizing at a sustainable pace of expansion. Exports from China have seen continued gains in recent months, allaying fears of a sharp slowdown. To help support domestic demand by reviving credit availability, China’s central bank has provided additional short-term funding to banks. However, the pace of Chinese manufacturing output growth slowed in October. Among other emerging countries, manufacturing output increased at a faster pace in Mexico and Turkey. Korea and Indonesia recorded declines in manufacturing activity during October, while India’s factory output expanded at a slower pace.
Though Euro-zone demand remains weak, the positive trends in U.S. consumer spending should help emerging countries in Asia and Latin America that export manufactured goods. China, South Korea, and Taiwan in Asia, as well as Mexico in Latin America, have seen healthy export growth in recent months. These gains are likely to be sustained as U.S. consumer confidence has seen further improvement, helped by the fall in unemployment and lower fuel prices. However the weak euro and Japanese yen could erode the price competitiveness of emerging market exporters in select industries such as capital goods and electronics. In the case of Mexico, part of the gains in exports of manufactured goods could be offset by the lower value of oil shipments.
Low energy prices should be of significant help to large emerging markets such as India and Indonesia that were facing widening current account and budget deficits earlier this year. The decline in oil prices is likely to substantially reduce the fuel subsidies in these countries, giving the government more flexibility to expand infrastructure spending. Cheaper fuel is also likely to lower inflation risks and allow the central banks to advance interest rate cuts, and help consumer demand further. China also reduced its fuel prices further in October, and cheaper fuel should lift domestic spending in the country, which represents the world’s largest automobile market.
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