During 2009, emerging markets experienced a tremendous surge after a significant fall at the end of 2008. The result of that surge was that during 2009 the MSCI Emerging Markets index returned 79 per cent in US dollar terms. Some markets even doubled during the year.
The surge in prices was a result of many factors but most significantly the rapid increase in money supply and liquidity supplied by governments globally to prevent an economic depression. This led to a huge influx of funds in the emerging markets asset class. In the first 11 months of 2009, emerging markets recorded nearly $75 billion (Dh275bn) in net inflows, about 40 per cent more than the record-high $54bn in 2007. In the past 15 years, net inflows have totaled more than $153bn. This trend is expected to continue.
Another critical aspect of the year was the way the two most populous countries in the world, China and India, forged ahead with incredible GDP growth of eight per cent and six per cent, respectively, in the first nine months of 2009 in the face of dire predictions regarding the global economy.
Of course, that is not to say that there have not been any anxieties in 2009 but they have been far and few. As long as global money supply continues its upward trend, we believe that the bullish sentiment in emerging markets can be sustained.
In fact, we could see more and more money being directed into emerging markets in the next 10 years as investors realise that they can buy good value at reasonable prices with relatively lower risk as compared to developed markets.
The rapid developments in emerging markets should allow these markets to command even greater attention in the global investment universe. In fact, emerging markets such as China, Brazil, Russia and India could become some of the world's most important and influential countries.
China continued to report encouraging economic data during the quarter. GDP growth accelerated in the third quarter of 2009 as the government's stimulus measures and robust bank lending continued to boost economic recovery. GDP grew nine per cent year-on-year during the third quarter, compared to eight per cent year-on-year in the second quarter. Exports recorded their smallest decline in more than a year with a contraction of just one per cent year-on-year in November.
Imports, on the other hand, jumped 27 per cent year-on-year, its first increase since October 2008. Value-added output also continued to record growth with output increasing 19 per cent year-on-year in November, higher than the 16 per cent year-on-year in October and 11 per cent year-on-year growth in June 2009. The increase has been mainly driven by infrastructure investment resulting from the government's stimulus measures.
Exceeding market expectations, the South Korean economy grew three per quarter-on-quarter in the third quarter of 2009. This was the fastest in more than seven years. Growth in the manufacturing and capital sectors coupled with stimulus spending and record low interest rates supported the domestic economy. South Korea's trade sector also reported positive data with exports returning to growth after more than a year. Exports rose 18 per cent y-o-y to $34.1bn in November, resulting in a trade surplus of $4.6bn.
The Indian economy grew eight per cent y-o-y in the third quarter of 2009, the fastest in 18 months. Key drivers of growth included government expenditure and private consumption. In comparison, GDP grew six per cent y-o-y in the preceding three-month period. Growth in the industrial sector remained robust with production increasing 10 per cent y-o-y in October. This was a significant improvement from the one per cent y-o-y in April 2009. Manufacturing output also recorded double digit growth with an 11 per cent year-on-year increase in November.
Brazil's GDP grew 1 per cent quarter-on-quarter in the third quarter of 2009, slightly faster than the growth recorded in the preceding quarter. In addition to the manufacturing and services sectors, growing demand for fixed capital and higher private consumption also supported growth during the quarter. An expansionary monetary policy, tax breaks and lower inflation increased disposable incomes. The industrial sector also continued to improve with output rising 2% m-o-m in October. This marked the tenth consecutive month of growth. However, on a year-on-year basis, industrial production was 3 per cent lower. This, was however, much better than the 15 per cent year-on-year decline in April 2009.
The South African economy returned to growth in the third quarter of 2009. Annualized GDP rose 1 per cent quarter-on-quarter, compared to a decline of 3 per cent year-on-year in the second quarter. Key contributors to growth included the manufacturing, government services and construction sectors. The government intends to implement plans to increase spending in infrastructure and social security despite the global economic crisis as the extra expenditure could support domestic demand and stimulate economic recovery. Higher global demand for commodities, a recovery in domestic demand as well as the preparations and hosting of the 2010 World Cup should further support economic growth in 2010.
Latest data showed that Russia's GDP grew 14 per cent q-o-q in the third quarter of 2009. Year-on-year, however, GDP contracted nine per cent, which was still an improvement from the 11 per-cent y-o-y fall in the second quarter of 2009. Government stimulus measures, favourable external conditions and lower interest rates supported the country's economic recovery. The Central Bank maintained an expansionary monetary policy during the fourth quarter as efforts to stimulate the domestic economy continued. The benchmark interest rate was cut by 100 basis points (1.0 per cent) to nine per cent. This brought the cumulative reduction in the rate to four per cent since April 2009.
Our outlook for emerging markets in 2010 is optimistic. We believe that emerging markets are in a secular bull trend.
Many countries have already returned to growth and we expect that growth to only strengthen in 2010. We have seen governments globally implement huge stimulus packages to bring economies out of recession and ensure that they maintain sustainable growth. Thus, we remain optimistic about the markets' upside potential.
However, it is important to realise that volatility is still with us and will be with us for a while. This means that there will be down markets as well as up markets. Risks such as the inability of governments to control the derivatives markets, loss of confidence, over or poor regulation, adoption of protectionist measures, and abandonment of the market economy philosophy do also exist. Therefore, we must pay attention to valuations and long-term earnings growth prospects.
Current valuations are below the five-year high valuations and as a result, are not excessive.
Thus, we look to 2010 with optimism keeping in mind that every bull market will have corrections. Our optimism is founded on: (1) growing investor confidence in equities, generally and emerging markets specifically, (2) strong fund inflows into emerging markets, (3) the search for higher returns in the face of low bank interest rates, (4) relatively higher GDP growth in emerging markets, (5) the accumulation of foreign exchange reserves which puts emerging economies in a much stronger position to weather external shocks, (6) the relatively lower debt levels of emerging market countries, and (7) the high level of money supply growth globally.
All these factors make emerging markets attractive to investors over the world.
- The views expressed are the writer's own
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