Emerging Markets Outperform on Improved Outlook for Large Asian Countries
Emerging market equity prices outperformed in January on expectations that economic conditions in large Asian countries such as China and India could brighten this year. Fourth quarter GDP growth in China met expectations, helped by higher industrial production and consumer spending. After the unexpected rate cut in December, the Chinese central bank has also lowered the reserve requirements for banks. In India, economic growth for the financial year ended March 2014 was revised higher after a change in base year used to calculate economic activity. The central bank in India announced an unexpected rate cut in January as inflation declined more than forecast. According to the most recent IMF forecasts, India is expected to grow faster than China in 2016. Among other Asian countries, Korea reported slower than expected expansion during the last three months of 2014 while the Philippine economy accelerated. South Africa also outperformed on expectations that the faster growing countries in Africa could lift exports and corporate earnings.
However, almost all emerging markets in Latin America and Europe saw further declines during the month as commodity prices remained weak. Even after the modest rebound at the end of the month, oil prices remain well below last year’s levels. Brazil, Colombia and Mexico saw the largest declines during the month. Greece was the worst hit in Europe after its newly-elected government insisted on restructuring the conditions of the financial bailout package signed by the country during the Euro-zone fiscal crisis. Trends from the manufacturing sector in major emerging countries were mostly unchanged from December. January factory output growth stagnated in China, compared to the previous month, while India, Korea, Taiwan and Brazil reported gains. Manufacturing output declined in Russia and Indonesia during the month of January.
Near-Term Outlook
The Chinese economy expanded 7.4 percent in 2014 and the growth rate could moderate further this year. However, the risk of a sharper slowdown has faded in recent months. The decline in China’s property market, widely feared to be the catalyst for a hard landing, has turned out to be less disruptive than expected. There have been no major corporate failures in the sector and the increase in bad loans for the banking industry is not too alarming. Home prices appear to have stabilized in some of the larger cities, as buyers have started returning. Helped by stronger U.S. demand, exports increased nearly 10 percent in December and the trend is expected to sustain in the coming months. Consumer spending in China has also seen moderate gains, expanding close to 12 percent in December. The Chinese central bank’s rate cut and lower bank reserve ratio should boost liquidity and aid domestic demand.
Economic data from India suggests improved growth this year as well as in 2016. Manufacturing and services sector output growth have seen consistent gains for the last several months. Inflation has reduced appreciably, and India’s central bank is expected to cut its benchmark rates again in the coming months. Capital inflows remain robust, both into the debt market as well as equities, and has held the Indian rupee relatively stable. The Indian government is expected to push forward with further reform measures this year, such as allowing more foreign ownership in sectors such as insurance. On the downside, exports from India are yet to see healthy gains even as higher domestic demand and the stable currency have pushed up imports.
This article is for informational purposes only. This article is not intended to provide tax, legal, insurance or other investment advice. Unless otherwise specified, you are solely responsible for determining whether any investment, security or other product or service is appropriate for you based on your personal investment objectives and financial situation. You should consult an attorney or tax professional regarding your specific legal or tax situation. The information contained in this article does not, in any way, constitute investment advice and should not be considered a recommendation to buy or sell any security discussed herein. It should not be assumed that any investment will be profitable or will equal the performance of any security mentioned herein. Thomas White International, Ltd, may, from time to time, have a position or interest in, or may buy, sell or otherwise transact in, or with respect to, a particular security, issuer or market on our own behalf or on behalf of a client account.
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.
(c) Thomas White International
