Emerging Markets Equity Commentary: August 2014

Export Demand Revival and Cheaper Oil Could Help Emerging Economies

Emerging market equity prices saw further gains in August and continued to outperform most developed markets for the third month in a row. Markets in Latin America bounced back strongly from recent declines, helped by expectations of political change in some countries in the region as well as a revival in global demand for industrial commodities. Brazil, which is holding presidential elections this October, was the biggest gainer for the month, followed by Mexico where the government has stepped up its reform efforts. In Asia, Thailand advanced on expectations of improved political stability while equity prices in India sustained the uptrend on signs of economic growth picking up speed. Emerging markets in Europe remained weak, despite signs of a possible ceasefire in Ukraine. Russia declined the most after reports of stronger economic sanctions against the country by the European Union and the U.S.

Economic data from the major emerging economies showed further improvement in aggregate growth, though select countries continue to face challenges. Among the Asian countries, India, Malaysia, and The Philippines reported faster than expected growth for the second quarter while Thailand saw a modest expansion and avoided a technical recession. Second quarter growth in Turkey was lower than expected, but the upward revision of first quarter data has helped the country maintain a healthy pace of expansion for the first half of this year. In contrast, the Brazilian economy remained weak during the second quarter and forecasts for the current year have been lowered. Rating agency Moody’s has lowered its outlook for Brazil, citing weak economic growth and fiscal challenges. Manufacturing sector output growth remained largely positive for the major emerging countries in August. Select emerging market currencies have weakened recently on concerns that the U.S. Federal Reserve may hike interest rates earlier than expected.

Near-Term Outlook

Recent export trends from select Asian countries suggest that the recovery in export demand is gaining momentum. Export gains for China and Taiwan for the month of August were larger than expected, while India has seen moderate export growth in recent months through July. Though shipments from Korea declined marginally in August, it was mostly due to subdued domestic demand in China. The positive trends were largely driven by the demand recovery in the U.S., where the economy expanded more than expected during the second quarter. U.S. consumer sentiment remains largely positive, helped by the sustained improvement in labor market conditions. This should help most Asian countries as well as select Latin American countries such as Mexico to maintain healthy export gains in the coming months. However, weak economic conditions in the Euro-zone limit the potential for further acceleration in export growth for the emerging countries.

International oil prices have declined recently, though geopolitical risks remain high in major oil producing regions such as the Middle East and Russia. If the current price levels are sustained, it could bring down inflation risks in large emerging countries such as China and India. This would allow more monetary and fiscal policy flexibility in several emerging countries, especially in India where the central bank is trying to lower headline inflation. In addition, lower fuel prices could help consumer spending in the developed countries and boost export demand for several countries in Asia and Latin America. In contrast, the economic outlook for countries that are more reliant on exports of energy and other commodities are likely to remain subdued.

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