Emerging Markets Equity Commentary: March 2014
Equities Gain on Expectations of Improved Global Economic Outlook
Emerging market equity prices made healthy gains during the month of March on expectations that select countries could see more stable political and economic environments later this year. Markets that had faced the worst selloffs last year such as Turkey, Brazil, Indonesia, and India were among the biggest outperformers during the month. Russia declined further on persistent geopolitical risks while investors remained cautious about the growth slowdown in China. The global economic outlook appears to be improving after the adverse winter weather in some of the developed countries moderated growth. Stronger consumer and industrial demand in the U.S. as well as Europe should help exports from the emerging countries.
Export data from China remained weak for the second successive month in March, and has added to concerns about a further growth slowdown. As the decline in shipments during February was partly due to the factory shutdowns for the Chinese New Year, there were expectations of a rebound in March. Nevertheless, trade data from select Asian countries for the month of March suggest that global demand is improving after the relatively weaker trends at the beginning of this year. Shipments from Korea and Taiwan were above expectations for the month and the healthy export order flows suggest that the gains could be sustained in subsequent months. India and Indonesia also saw moderate growth in February exports. However, Brazil continued to see lower exports in March and the country’s trade deficit widened during the first quarter. Factory output declined in China for the second successive month in March, though a government survey indicated a marginal improvement from the previous month. Brazil saw further gains in manufacturing output, while the pace of expansion slowed in Indonesia, India, and Mexico. The prospect of wider economic sanctions against the country has hurt business sentiment in Russia, where factory output declined sharply. Interest rates have been hiked further in Brazil, while India and Indonesia left the rates unchanged in March.
The growth outlook for emerging economies remains relatively stable and could see improvement if the global economy gathers pace later this year. The International Monetary Fund has marginally lowered its emerging market growth forecasts for this year and 2015, mostly due to the anticipated slowdown in resource exporting countries. Russia is likely to see appreciably lower growth this year while most Latin American countries as well as South Africa should see moderation in economic expansion. Asian and European countries are likely to do relatively better. Though there are growing expectations of further fiscal stimulus measures in China, it is expected that such programs will be limited in scale when compared to earlier years.
Select emerging markets with economies that are considered fragile are seeing renewed investor interest since the beginning of this year. Policy changes introduced in some countries last year following the steep correction in equity prices and currencies appear to be successful so far. Several of these countries, India and Indonesia among them, are having elections in the coming months and the possibility of stable and pro-growth governments being formed has increased. It is expected that the new governments would be able to reinvigorate these economies through a mix of reforms and policy initiatives. In Turkey and Thailand, there are expectations that the political confrontation will ease and the governments will be able to focus on stabilizing their economies. Elections held in Thailand earlier this year have been cancelled by the Constitutional Court, and fresh elections are likely later this year. Brazil has also scheduled presidential elections later this year. Though the current administration is expected to be reelected in Brazil, there are expectations of positive policy changes.
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