After a breather in June, emerging markets continued on an upward trend in July. The MSCI Emerging Markets index returned 11.3 per cent in dollar terms. This brought the year-to-July return to 51.6 per cent. Strong portfolio inflows and higher confidence in emerging market equities drove prices. Asian markets were the strongest performers during the month as the region continued to attract significant fund inflows. Indonesia, South Korea, Singapore and the Philippines were among the top performing markets in the region. In Latin America, high commodity prices and stronger domestic currencies supported the region's uptrend. Eastern European markets also recorded double-digit gains with Poland, Hungary and the Czech Republic outperforming their regional peers. South Africa, however, underperformed its emerging market peers with a 5.1 per cent return in July.
ASIA
GDP growth in China accelerated to 7.9 per cent year-on-year (y-o-y) in the second quarter of 2009 from 6.1 per cent y-o-y in the first three months of the year. Fiscal stimulus measures and an expansionary credit policy supported the economy. This brought the growth for the first half of 2009 to 7.1 per cent y-o-y. Key drivers included investment in fixed assets and infrastructure as well as consumer expenditure. Foreign exchange reserves increased 17.8 per cent y-o-y to $2.1 trillion (Dh7.7trn) in June, making China the first country to exceed the $2trn mark. Consumer prices remained on a downward trend with prices declining 1.7 per cent in June. This compared to a 1.4 per cent contraction in May. In June, a Chinese trade and investment promotion mission visited Europe where a number of agreements were signed with Italy, Finland, Portugal and Sweden.
South Korea reported encouraging economic data in July. The economy grew 2.3 per cent q-o-q, accelerating from the 0.1 per cent q-o-q growth in the preceding quarter as government efforts to stimulate growth continued to produce results. Growth in private consumption, gross fixed capital formation and manufacturing output drove economic growth during the period. Moreover, inflationary pressures continued to ease with consumer prices increasing 2.7 per cent y-o-y in May, the lowest increase in more than a year. Foreign exchange reserves reported a record monthly increase of $14.3 billion to $226.8bn in May, an increase of seven per cent month-on-month. Aimed at boosting bilateral relations, President Lee Myung-Bak visited Poland and Sweden in July. The ruling Grand National Party announced plans to push for a parliamentary vote, which could lead to amendments in media and labour regulations.
LATIN AMERICA
In Mexico, the Central Bank implemented its final interest rate cut in July, marking the end of the current expansionary monetary cycle, as it balanced efforts to curb inflationary pressures and revive economic growth. The bank cut the benchmark interest rate by 25 basis points (0.5 per cent) to 4.5 per cent, bringing the total reduction for the first seven months of the year to 375 basis points (3.75 per cent). The bank also expects the economy to strengthen in the second half of 2009. While inflation eased to 6.0 per cent y-o-y in May, from 6.2 per cent in April, prices remained higher than the bank's two to four per cent target. Politically, the ruling Partido Acción Nacional (Pan) experienced the worst defeat in its party's history in the July legislative elections. Pan won 28 per cent of the votes, losing to the opposition Partido Revolucionario Institucional (PRI), which won 36.7 per cent of the votes.
The Central Bank of Brazil signalled an end to monetary easing in July as the economy began to show signs of recovery. The bank cut its key interest rate by 50 basis points (0.5 per cent) to a record low of 8.75 per cent. Since January, the interest rate has been cut by 500 basis points (five per cent). Inflation fell to 4.8 per cent y-o-y in June, its lowest level since November 2007, mainly due to a weak domestic economy and relative lower commodity prices. In an effort to accelerate recovery in the domestic economy, the government extended tax breaks and stimulus measures. Initiatives included tax cuts on 70 products as well as subsidised loans to support the ailing capital goods sector.
AFRICA
International ratings agency, Moody's, upgraded South Africa's foreign currency credit rating by one level to A3 from Baa1, in view of the country's resilience to the global financial crisis. This will lower the cost of servicing the country's foreign debt. Its local currency rating was, however, reduced by one level to A3 from A2. Improving investor appetite for emerging markets saw portfolio and foreign direct investment flows into South Africa turn positive in 2009. Portfolio inflows
totalled $2.2bn in the first five months of 2009 while FDI inflows reached $1.3bn in the first quarter. Foreign exchange reserves also increased to $30.4bn as of end-March 2009.
EUROPE
Economic data released during the month signalled a possible bottoming in Russia's economic decline. After three consecutive months of decline, industrial production
grew 4.5 per cent m-o-m in July. This reduced the y-o-y decline to 12.1 per cent y-o-y from 17.1 per cent y-o-y in June. Moreover, manufacturing output contracted 16.0 per cent y-o-y, an improvement from the 23.7 per cent y-o-y decline in June. The Central Bank maintained an expansionary monetary policy by cutting its benchmark interest rate by 50 basis points (0.5 per cent) to 11 per cent due to easing inflationary pressures and efforts to support the economy. Consumer prices rose 11.9 per cent y-o-y in June, an 18-month low. US President Barack Obama met his counterpart in Russia, where both sides signed an agreement on nuclear arms reduction. Meanwhile, Foreign Minister Sergei Lavrov visited Vietnam where both countries vowed to boost trade and increase cooperation in the energy, telecommunications and technology sectors.
The Turkish Central Bank maintained an expansionary monetary policy in July as domestic investment and external demand remained weak. The bank cut its benchmark borrowing interest rate by 50 basis points (0.5 per cent) to 8.25 per cent. Inflation remained relatively low at 5.7 per cent y-o-y in June. Turkey and Chile signed a free trade agreement in July to boost bilateral trade and economic. Trade between the two countries is expected to double as a result of the accord. The government was in the process of finalising a medium-term economic programme, which would include national strategy for 2010-2012.
- The writer is Executive Chairman of Templeton Asset Management Ltd
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