Emerging Markets Outperform on Brighter Economic Outlook
Emerging market equities outperformed during the month of December, helped by signs of further improvement in the economic growth outlook. Economic data released over the month were largely positive for most emerging countries, and strengthened the optimism that these markets could see a moderate improvement in growth rates during 2013. The last minute agreement put together by U.S. lawmakers to avoid the ‘fiscal cliff’ and weaker growth in the world’s largest economy lifted investor sentiment, as U.S. demand is currently driving the recovery in export shipments from Asia and elsewhere. Signs of further stabilization in European financial markets, especially the continued decline in sovereign bond yields of countries such as Spain, also encouraged investors. Investment flows into emerging market assets were robust as interest rate differentials with the developed markets remain attractive.
Manufacturing data from the emerging economies showed further improvement in December, as sustained domestic consumption growth and the improvement in external demand are encouraging higher production. After several months of decline, output started expanding again in Korea and Taiwan, while the pace of growth accelerated in India and Mexico. Manufacturing continued to expand in China, Brazil, Russia, and Indonesia, though at a slower pace. Export trends from Asia continued to be mostly positive as growth in shipments from China accelerated in December, though South Korea reported an unexpected decline after two months of growth. South Africa’s credit ratings have been lowered, as the country continues to face labor unrest in the mining sector that could limit economic growth.
Near-term Outlook
The prospect of faster growth in the U.S. has lifted the outlook for emerging economies in Asia and Latin America that are reliant on exports. Though the rise in U.S. payroll taxes could restrict spending, especially by lower income consumers, the deal to avoid the fiscal cliff is widely expected to be positive for the U.S. economy in 2013. Recent trends from the housing sector suggest further gains, as the rise in average home prices and record low mortgage rates are attracting more home buyers. Though the monthly job additions have not yet gained pace, the trend confirms the ongoing gradual improvement in labor market conditions. However, delays in arriving at a deal to increase the U.S. government’s borrowing limit could negatively affect business and consumer sentiment. At the same time, the more than $110 billion in stimulus measures announced by Japan could lift activity in that country and positively reflect on export demand for the large emerging economies.
Though prices of select industrial materials like iron ore have seen a moderate recovery in recent weeks, energy prices have not yet reacted to the improved global economic outlook. This is likely due to U.S. domestic oil production that continues to outpace expected demand growth in the world’s largest energy consuming country. If energy prices remain at current levels, inflation risks are likely to be low and central banks in emerging countries will have more flexibility to maintain low interest rates. In addition, governments in most emerging countries are expected to maintain the fiscal incentives introduced last year to support domestic demand growth.
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FORWARD LOOKING STATEMENTS
Certain statements made in this article may be forward looking. Actual future results or occurrences may differ significantly from those anticipated in any forward looking statements due to numerous factors. Thomas White International, Ltd. undertakes no responsibility to update publicly or revise any forward looking statements.
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