Emerging markets recorded double-digit returns for the third consecutive month in May. The MSCI Emerging Markets Index returned 17.1 per cent in US dollar terms. Part of this return was due to weakness in the US dollar. This brought the year-to-May return to nearly 40 per cent. The desire for higher returns, a return of confidence in emerging markets and the search for undervalued companies support the markets' uptrend.

Eastern European markets remained the strongest performers with Hungary ending the month up 27.3 per cent and Russia returning 31.9 per cent. Turkey gained 15.1 per cent after a 29.7 per cent return in April. South Africa performed in line with its emerging market peers with a 16.3 per cent return for the month. Stronger domestic currencies and higher commodity prices supported Latin American markets. Asian markets continued to attract significant portfolio inflows allowing markets such as China, India, Thailand and Taiwan to record double-digit returns. South Korea, on the other hand, underperformed with a 4.1 per cent return, on rising geopolitical tensions with North Korea on news of the latter's nuclear tests during the month.



Asia focus

After a very strong first quarter, credit growth in China slowed in April with new banking lending totalling $87 billion (Dh319bn). New loans totalled $670bn in the first three months of the year. The Central Bank, however, said that ample liquidity would be maintained to support the domestic economy. China continued efforts to boost relations with its trading partners in May. Brazilian President Luiz Inacio Lula da Silva and President Hu Jintao signed a number of agreements during the former's recent trip to China. Moreover, Premier Wen Jiabao visited Europe in May to attend the 11th China-European Union (EU) summit.

South Korea registered a record high current account surplus of $6.7bn in March, as imports declined faster than exports due to slowing economic growth. This compared to a surplus of $3.6bn in February. Recording a double-digit decline for the fifth consecutive month, industrial output showed signs of moderation with a better-than-market expected 10.6 per cent year-on-year decline in March. South Korean and EU trade ministers agreed to accelerate the completion of the bilateral trade agreement with additional talks planned for June. The National Assembly ratified a supplementary budget totalling $23bn to the existing $230.4bn budget to support the economy.



Latin America

The Mexican economy contracted 8.2 per cent year-on-year 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 year-on-year and the public sector deficit to be 1.8 per cent to 2.0 per cent of GDP. Bank of Mexico Governor Guillermo Ortiz expects annual GDP growth to turn positive in the final quarter of 2009 or the first quarter of 2010. A recovery in demand for Mexican exports in the next three months was also a possibility, according to the governor. Inflationary pressures continued to ease, albeit at a slow pace, mainly due to weaker domestic demand. Consumer prices rose six per cent year-on-year in March, compared to a 6.2 per cent increase in February.

The Brazilian Government lowered its GDP growth forecast for 2009 to one per cent year-on-year from 2.1 per cent y-o-y in view slowing growth globally. Brazil's trade surplus totalled $3.7bn in April, more than double the $1.7bn recorded a year earlier. Strong Chinese demand for raw materials such as soybeans, iron ore and raw sugar boosted export revenues, which totalled $12.3bn. Imports declined 26.6 per cent year-on-year to $8.6bn as a result of weaker domestic demand. Aimed at further boosting trade and economic relations, Lula also visited Turkey where both sides vowed to further develop bilateral relations.



Africa

The South African Reserve Bank cut its benchmark interest rate twice in May, each time by 100 basis points (one per cent) to end the month at 7.5 per cent, on news that the economy was officially in a recession and inflation remained relatively high. GDP declined 1.6 per cent q-o-q and 6.4 per cent year-on-year in the first quarter of 2009. Double-digit declines in the manufacturing and mining sectors had the largest impact on growth. The construction sector, in contrast, contributed to economic growth with a 9.4 per cent increase in government infrastructure. Manufacturing output contracted 22.1 per cent year-on-year, while mining and quarrying output declined 32.8 per cent year-on-year in the three-month period. Consumer prices rose 8.4 per cent year-on-year in April, in line with the 8.5 per cent year-on-year increase recorded in March. Prices, however, slowed significantly on an month-on-month basis with a 0.5 per cent increase in April, compared to a 1.3 per cent increase in March.



Europe

Russia's Central Bank maintained an expansionary monetary policy in May by cutting its benchmark interest rate by 50 basis points (0.5 per cent) to 12 per cent. Consumer prices eased to 13.2 per cent year-on-year in April, a 14-month low. Prime Minister Vladimir Putin paid a visit to Japan to discuss increasing bilateral relations in the energy and business sectors. Trade between the two countries has grown to nearly $30bn in 2008 from about $5bn in 2000. Putin also visited Mongolia and Deputy Prime Minister Sergey Ivanov met Armenian President Serzh Sargsyan to expand strategic relations between the two nations.

Turkish Prime Minister Recep Tayyip Erdogan reshuffled his cabinet during the month. Former Foreign Minister Ali Babacan was appointed as State Minister and Deputy Minister responsible for the Turkish economy. Babacan is expected to take over negotiations with the International Monetary Fund for a new loan agreement from Mehmet Simsek who became the new Finance Minister.

As part of its stimulus package, the government extended the list of goods that were eligible for a reduction in value added tax to eight per cent from 18 per cent. Industrial output weakened 20.9 per cent year-on-year in March as the weaker global economy continued to impact export demand. Despite the double-digit contraction, the decline was an improvement from the 23.8 per cent year-on-year drop in February. 



- The writer is the Executive Chairman of Templeton Asset Management

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