Emerging Markets Equity Commentary: September 2014
Equity Prices Decline, Although Emerging Economies Show Modest Pace of Expansion
Emerging market equity prices corrected in September on concerns about weaker global growth even as the U.S. Federal Reserve is set to wind down its bond purchases. Signs of yet another downturn in the Euro-zone economy are likely to hurt the export outlook for the major emerging countries that had seen a modest improvement in exports in recent months. There are also growing concerns about a further slowdown in China, though the government has so far been successful in stabilizing economic growth. The Latin American markets declined the most as commodity prices slipped appreciably during the month. Brazil, where the ongoing presidential election has worsened the uncertainties, was the worst performer among major markets during the month. Korea, Taiwan, and China underperformed in Asia while Turkey and Greece saw the largest price decline in Europe. Thailand, the Philippines, and Poland ended the month with marginal gains.
Despite the growing concerns about slower growth, economic data from the major emerging countries continued to show a moderate pace of expansion during the month of September. Manufacturing output growth was stable in China when compared to the previous month, while the country’s services sector expanded at a slower pace. Factory output continued to expand in India and Russia, though not as fast as in recent months, but Brazil saw a further drop during September. Select countries including Indonesia and Turkey reported an improvement in new factory orders. Exports from China increased more than expected in September, while imports rebounded after declining for the previous two months. Exports from Korea were also clocked above forecasts, but India and Taiwan reported lower than expected gains during the month. Emerging market currencies, especially the currencies of major resource exporters, weakened as the U.S. dollar strengthened.
The Chinese government has so far succeeded in preventing a deeper property market crisis, though the effect of the mini stimulus appears to be waning. Exports from China have rebounded in recent months, helped by stronger U.S. demand, while domestic consumer demand has not declined despite the restrictions on credit availability. If global demand declines further, the Chinese government has sufficient fiscal flexibility to expand public spending and support domestic demand. While European demand is expected to remain subdued in the near-term, healthy export demand from the U.S should help other Asian countries such as Korea and Taiwan, as well as Mexico in Latin America.
Expectations of a new pro-business leadership in Brazil after the presidential elections have increased recently, but the near-term outlook for the country remains clouded by weaker commodity prices. Even if the current administration retains power, it is likely that the growing criticism of its economic policies could encourage changes in the future. Meanwhile, Russia is likely to be hurt by the risk of a prolonged standoff over Ukraine, coupled with economic sanctions against the country and lower commodity export prices.
The steep fall in energy prices could be a significant growth driver in large emerging countries such as China, India, and Indonesia. The reduction in fuel prices could boost consumer surplus, and could have positive effects similar to a sizeable fiscal stimulus. Lower inflation may allow some of the central banks to ease interest rates earlier, and boost demand further. The governments in these countries would also see improved fiscal health on the back of lower fuel subsidies and would be in a better position to increase public spending, if required.
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