Emerging markets show overall growth trend

Emerging markets recorded mixed results in August and the MSCI Emerging Markets index ended the month virtually unchanged. Year-to-date, however, emerging markets were still up 51 per cent.

While Eastern European and Latin American markets continued to record positive returns, Asian markets, as represented by the MSCI AC Asia ex Japan index, lost three per cent. Concerns of policy tightening in China dragged regional markets down. Thailand, Pakistan and South Korea, however, bucked the trend and recorded positive performances in August. Eastern European markets benefited from lower interest rates and subsiding credit crunch worries. South Africa outperformed its emerging market counterparts with a six per cent return in US dollar terms. In Latin America, Argentina and Mexico were among the top performers.



Asia

Dispelling policy tightening fears, Chinese Premier Wen Jiabao stated that the government would maintain its current macroeconomic policy to ensure continued growth in the domestic economy. The central bank also announced that monetary policy would remain moderately loose to support growth. Foreign direct investment (FDI) inflows declined 36 per cent year-on-year (y-o-y) to US$5.4 billion (Dh19.83b) in July. This brought the year-to-July total to US$48.4b.

Fixed asset investment, however, jumped 34 per cent y-o-y in the first half of 2009. Retail sales increased 15 per cent y-o-y in July largely due to greater demand for automobiles resulting from government initiatives. Boosting trade and economic ties between China and Pakistan, Pakistani President Asif Ali Zardari visited China in August where the two countries signed eight Memoranda of Understanding (MoU) in sectors such as energy, agriculture and healthcare.

Bank of Korea Governor Lee Seong-tae maintained a positive view on South Korea's economic growth. While some uncertainties remained, Lee expects the economy to record positive quarter-on-quarter (q-o-q) growth in the latter half of 2009, in part due to a recovery in the private sector.

The bank also maintained its benchmark interest rate at two per cent, a record low, to support the economy. Inflationary pressures continued to ease with consumer prices rising two per cent y-o-y in July, its lowest in more than nine years. During the month, the government announced plans to privatise or merge 41 state-owned enterprises. Government stakes in companies, which were supported by public funds during the financial crisis, are also expected to be sold this year.


Latin America

In Mexico, GDP contracted 10 per cent y-o-y in the second quarter of 2009 as a result of the global economic crisis and swine flu outbreak. In comparison, GDP fell eight per cent in the first quarter of the year. Declines in the manufacturing, construction and retail sectors had negatively impacted GDP during the period.

Mining output, however, posted a positive growth after declining for more than two years while the primary sector grew one per cent y-o-y. Leaders from the US, Canada and Mexico gathered in Guadalajara, Mexico, during the month for their annual summit. While the importance of dialogue was stressed to ensure economic recovery, no major agreements were reached.

The International Monetary Fund commended Brazil's strong macroeconomic foundation, which allowed the country to "increase its resilience to the global economic crisis" and maintain financial stability. The organisation also remained confident of Brazil's banking sector. Credit growth has been improving with bank lending recording positive monthly growth in the past four consecutive months. This brought the year-to-June growth in bank lending growth to 20 per cent y-o-y. Industrial production continued to record positive month-on-month (m-o-m) growth for the sixth consecutive month in June. But automobile manufacturing output declined 1 per cent m-o-m in July.


Africa

The South African economy contracted three per cent q-o-q in the second quarter, its third consecutive quarterly decline. It was, however, a significant improvement from the six per cent q-o-q contraction in the first quarter of 2009. The manufacturing, wholesale and retail trade and hospitality sectors were the major culprits. Conversely, growth in construction and mining activity, ahead of the upcoming 2010 World Cup and a recovery in Chinese demand for commodities, had a positive impact on GDP. Signalling the likelihood of improved relations between the US and South Africa, US Secretary of State Hillary Clinton visited South Africa in August where she also met with President Jacob Zuma.


Europe

Russia's GDP declined 11 per cent y-o-y in the second quarter of 2009. This compared to a contraction of 9.8 per cent y-o-y in the first three months of the year. Major reasons for the economy's performance included weak external demand, investment and consumption.

More recent data, however, showed continued improvement in industrial production with output increasing five per cent y-o-y in July, higher than the growth in June. In an effort to cut public expenditure, the Russian government announced plans to freeze public sector wages and subsidies in 2010. A budget deficit of eight per cent of the GDP is expected for 2010.

Russia and Turkey signed energy agreements as well as a customs accord to improve trade relations while Russia has also approved a nuclear energy deal with Turkey.

The Turkish Central Bank maintained an expansionary monetary policy in August to support the domestic economy. The bank cut its benchmark borrowing interest rate by 50 basis points (0.5 per cent) to 7.75 per cent. Inflation kept easing with consumer prices increasing five per cent y-o-y in July, lower than the six per cent y-o-y in June and below the bank's eight per cent target for the end of the year.


-The author is Executive Chairman of Templeton Asset Management and contributes a monthly column exclusively to Emirates Business. The views expressed are his own.

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