Market Overview

Emerging Markets Equity Commentary: May 2014


Equity Prices Outperform, Helped by Gains in India and China

Emerging market equity prices outperformed the developed markets in May, helped by gains in India and China as well as a rebound in Russia. After the disappointing data trends from the first quarter, the Chinese economy appears to have started a moderate recovery. Exports from China gained in May, indicating improving global demand as U.S. economic activity has gained pace after the winter slowdown. In India, the recent elections have led to the formation of a stable government with a parliament majority. It is expected that the new Indian government will be able to address some of the policy inactivity of recent years and revive domestic demand and investments. The diplomatic tensions between Russia and the developed western countries over the former’s annexation of select regions of Ukraine have not worsened, as both sides appear to prefer holding to their current positions. Accordingly, Russian equity prices that were beaten down since the beginning of this year rebounded in May.

First quarter economic growth in China at 7.4% was lower than the previous quarter, but marginally better than expectations. Growth improved somewhat in India during the first three months of this year, but the pace remains close to the lowest level in a decade. Among the other Asian economies, Korea, Malaysia, Indonesia, and Taiwan saw healthy growth while Thailand saw a decline due to political instability. The Brazilian economy slowed further during the first quarter, as lower industrial output and investments offset higher farm production and increased government spending. Manufacturing data from the emerging countries for the month of May remained stable, but did not show appreciable improvement from the subdued trends from recent months. Export data from Asia for the month of May were mixed. While China and India showed improvement, shipments from Korea were weaker than expected as holidays reduced the number of working days during the month.

Near-Term Outlook

Equity prices in India have seen appreciable gains this year as the country’s new political leadership is expected to ring in more business friendly policies and step up infrastructure spending to remove some of the growth bottlenecks. Major focus areas for the government are likely to include increasing electricity generation capacity, improving transportation infrastructure, as well as new tax reforms. The initiative to consolidate all indirect taxes under a single national value added tax structure, which was under negotiation between the federal and state governments for the last several years, is now expected to be implemented. The government could also increase the foreign investment limits in sectors such as insurance, to attract capital inflows. The effective policy measures introduced last year by the previous Indian government and the central bank have helped narrow the current account deficit and stabilize the currency, and have contributed to market optimism. Nevertheless, inflation remains a concern and supply shortages could push up prices as the economy revives. The central bank is likely to be cautious of inflation risks which could delay interest rate cuts anticipated later this year or early next year.

May export gains have brightened the outlook for China as healthier demand in the U.S. and Europe is expected to help sustain the growth in shipments. However, the weaker than expected import data suggests that domestic demand is not robust enough. This could be due to lower consumer confidence as property prices are correcting and the government’s fiscal stimulus measures so far have been limited in scale. The World Bank believes the Chinese government has sufficient flexibility to expand the stimulus measures, though the bank says doing so would only perpetuate the current economic model. However, it is unlikely that the Chinese government would consider meaningful policy measures to boost domestic demand unless the economy decelerates appreciably from the current growth pace.


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