Data Trends Remain Positive, but Equity Prices Witness Second Monthly Fall in a Row
Emerging market equity prices saw a modest correction for the second successive month in December, as investors remained cautious about the outlook for some of the emerging economies. Select countries such as Thailand in Asia and Turkey in Europe continue to face difficult political environments, with large demonstrations against the governments. Their currencies have reacted negatively to the latest developments, making investors fearful of a repeat of the volatile market movements seen during the third quarter of 2013. At the same time, improved economic trends from the U.S. and Europe continue to support the prospect of faster export growth for emerging countries in Asia and Latin America. Apart from Thailand and Turkey, the Philippines and China also lagged during the month while India, Malaysia, Taiwan, and South Africa outperformed.
Economic data trends remained modestly positive for most major emerging economies during December. Manufacturing output expanded at a faster pace in Korea, Mexico, and Taiwan, which are benefiting from improved demand for manufactured goods in the developed world. Factory output continued to grow in China, India, Turkey and Indonesia, while in Brazil output growth resumed. Russia was the only major emerging country that saw a decline in output during the month. Services output expanded further in China and Brazil, while India continued to see a decline. Central banks in India and Mexico held their benchmark rates unchanged in December, as they awaited inflation trends to become clearer. Exports from Korea increased at a faster than expected rate in December, allowing the country to post a record trade surplus for 2013. Chinese export gains were relatively more modest in December and the country missed the official 2013 export growth target of 8 percent by a small margin.
Near-term Outlook
Concerns about the negative impact of reduced monetary policy stimulus from the U.S. Federal Reserve on emerging economies have somewhat faded in recent months. The Fed’s announcement of bond purchase tapering in December did not cause much volatility in emerging market asset prices. While it is now expected that the Fed will wind down its bond purchases by the first half of 2015, it is likely that the Fed funds rate will be maintained at the current level for the next two years to avoid any risks to U.S. growth. In such a scenario, capital inflows to emerging market assets are not expected to see any significant decline. In fact, despite the increased market volatility during the second half of 2013, aggregate bond sales by emerging market issuers in international markets exceeded $500 billion during the year.
Improving consumer demand in the U.S. and Europe is likely to be most significant driver of emerging market growth in 2014. Helped by the steady labor market gains and relatively subdued fuel prices, U.S. consumer sentiment has revived in recent months. In Europe, the labor markets have stabilized and unemployment levels are at record lows in major countries such as Germany. The improving export demand was reflected in trade data from Asia and Latin America in recent months. However, domestic demand growth is likely to remain muted in most emerging economies as central banks are expected to be cautious of inflation risks and excessive credit growth.
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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