Emerging markets surge on confidence

Emerging markets (EMs) surged in the second quarter of 2009 with the MSCI Emerging Markets index returning 34.8 per cent in US dollar terms. Part of this return was due to weakness in the US dollar.

A return of confidence in emerging markets, the desire for
higher returns and the search for undervalued companies support the markets' uptrend.

Latin American and Eastern European markets were among the strongest performers during the quarter while most Asian markets also recorded strong double-digit returns. A rebound in commodity prices and stronger domestic currencies supported markets in Latin America.

Asian markets continued to attract significant portfolio inflows allowing markets such as China, India and Thailand to outperform their regional counterparts.

In Eastern Europe, Hungary returned 69.7 per cent in US dollar terms in part due to a strong Forint. Poland returned 37 per cent in US dollar terms, while Russia ended the quarter up 37.8 per cent. Turkey was among the top emerging market performers with a return of 57.2 per cent in US dollar terms. A stronger Rand led the South African market to end the three-month period with a 31.3 per cent gain in US dollar terms.

The growing assertiveness and importance of emerging markets in the global economy was demonstrated when Brazil, Russia, India and China held an inaugural summit in Russia where they called for greater involvement from emerging economies in global financial institutions.

China's GDP grew 6.1 per cent year-on-year in the first quarter of 2009, compared to 6.8 per cent in the last quarter of 2008. This was mainly due to a decline in export growth and lower manufacturing and industrial growth. Investment in fixed assets, however, increased 28.8 per cent, as government efforts to boost economic recovery showed results. A rebound in industrial production and retail sales growth in May continued to point towards the success of the government's stimulus measures.

Regional update

Government efforts to stimulate South Korea's economy showed some results in the first quarter of 2009. GDP grew 0.1 per cent quarter-on-quarter, after declining 5.1 per cent in the last three months of 2008. Key drivers included a rebound in private consumption and government expenditure. While quarterly exports declined 4.2 per cent, the contraction was an improvement from the 8.9 per cent fall reported in the final quarter of 2008. After cutting its benchmark interest rate by a total of 325 basis points (3.25 per cent) in the preceding six months to support the domestic economy, the Central Bank left the rate unchanged at a record low of two per cent in June.

In an effort to support the financial sector, the Financial Services Commission launched a $15 billion (Dh55bn) fund to recapitalise the country's largest banks.

The Mexican economy contracted 8.2 per cent in the first quarter of 2009, as a result of declines in the manufacturing, construction, retail and tertiary services sectors. The government forecasts 2009 GDP to decline 4.1 per cent. The industrial sector continued to suffer with production contracting 13.2 per cent in April, more than double the 6.4 per cent fall in March. The Central Bank continued to lower interest rates during the quarter as part of efforts to stimulate the domestic economy. The Bank reduced its benchmark interest rate by 200 basis points (two per cent) to 4.75 per cent. Inflationary pressures maintained a downward trend due to lower domestic demand.

In Brazil, the GDP declined 1.8 per cent in the first three months of 2009, its sharpest contraction in more than 10 years. This was mainly due to weak global demand and investment in machinery and equipment which resulted in a 15.2 per cent decline in exports and a 14 per cent drop in gross fixed capital formation.

On the positive side, private consumption rose 1.3 per cent. South Africa's GDP declined 1.6 per cent and 6.4 per cent in the first quarter of 2009. Double-digit declines in the manufacturing and mining sectors had the largest impact on growth.

The Russian economy contracted 9.8 per cent in the first quarter of 2009, compared to a 1.2 per cent growth in the final three months of 2008. Weakness in manufacturing and construction were the key culprits. The manufacturing sector declined 23.5 per cent, while construction output fell 20.9 per cent. After increasing the benchmark interest rate by 300 basis points (three per cent) in 2008, the Central Bank switched to a loosening monetary policy in April, by cutting its benchmark interest rate for the first time since June 2007.

In Turkey, GDP declined 13.3 per cent in the first three months of 2009. While growth in public spending supported GDP, contractions in private consumption, exports and gross fixed capital formation led GDP to fall. Exports fell 11.3 per cent while gross fixed capital formation declined 29.7 per cent y-o-y. The Central Bank maintained an expansionary monetary policy to support the domestic economy.

Economic outlook

The outlook for emerging markets remains positive to their relatively strong fundamental characteristics. While some emerging economies contracted in early 2009, most are expected to return to positive growth by 2009-end or 2010. In the face of the global slowdown, the major markets of China and India continue to record exceptionally robust growth. China and India are expected to grow by eight per cent and six per cent, respectively, in 2009. The accumulation of forex reserves also puts emerging economies in a much stronger position to weather external shocks with reserves.

Moreover, an important and strong contributor to growth in emerging markets has been the growing middle class. Emerging markets account for more than 80 per cent of the world's population, providing them with a strong purchasing power and the ability to spend their way into growth. At the forefront are markets such as China, India and Brazil. Another area that is poised to support economic growth in emerging markets is investment, particularly in infrastructure. This is another area in which we have seen governments boost public spending.

More importantly, the current valuations of emerging markets remain attractive.



- 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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