Emerging markets surged in the third quarter of 2009. The MSCI Emerging Markets index rose 21 per cent in US dollar terms during the period. This brought the year-to-date return to 65 per cent in dollar terms. Part of this return was due to weakness in the greenback. Strong portfolio inflows and higher confidence in emerging market equities continued to drive prices.
Chinese Premier Wen Jiabao signalled his country would maintain a loose monetary policy to support the economy's recovery. While bank lending slowed down recently, it totalled $1.2 trillion (Dh4.4trn) in the first eight months of 2009, exceeding market expectations and accounting for nearly 70 per cent of the total for all of 2008.
The country also continued to report robust macroeconomic data during the quarter. GDP growth accelerated to eight per cent year-on-year in the second quarter of 2009 from six per cent year-on-year 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 seven per cent year-on-year.
The South Korean economy grew at its fastest pace in more than five years in the second quarter of 2009. Revised data showed GDP growth of three per cent quarter-on-quarter, compared to minimal growth in the first quarter of 2009.
Government efforts to stimulate growth continued to produce results as domestic demand improved as a result of tax incentives and easier access to credit. Rise in private consumption, gross fixed capital formation and manufacturing output drove economic growth during the period. Private consumption increased four per cent in the three months ended June 2009, significantly higher than the increase in the first quarter.
In Mexico, GDP contracted nine per cent year-on-year in the first half of 2009 as a result of the global economic crisis and the swine flu outbreak. Declines in the manufacturing, construction and retail sectors negatively impacted GDP. Although industrial output continued to decline, signs of recovery remained evident.
Output fell seven per cent year-on-year July, an improvement from the 10 per cent year-on-year decline in June and 13 per cent year-on-year fall in February. The Finance Ministry forecasted GDP to contract seven per cent year-on-year in 2009 due to the weak first half. The country is expected to return to growth in 2010 with the Ministry expecting a growth of three per cent year-on-year for the year.
More than a year after Brazil was awarded investment grade status by Standard & Poor and Fitch Ratings, Moody's upgraded the country's sovereign debt to investment grade in September.
Brazil's stable macroeconomic fundamentals and strong fiscal and monetary policies also allowed the economy to return to growth after recording two consecutive quarters of contraction. GDP grew two per cent quarter-on-quarter in the second quarter of 2009, as tax breaks, monetary easing and lower inflation boosted consumer expenditure.
The South African economy contracted three per cent quarter-on-quarter in the second quarter, its third consecutive quarterly decline. It was, however, a significant improvement from the six per cent quarter-on-quarter decline 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 Fifa World Cup, and a recovery in Chinese demand for commodities, had a positive impact on GDP. The South African Reserve bank left its benchmark interest rate unchanged at seven per cent in September, as inflationary pressures continued to ease.
Russia's GDP declined 11 per cent year-on-year in the second quarter of 2009. This compared to a contraction of 10 per cent year-on-year in the first three months of the year. Major reasons for the economy's performance included weak external demand, investment and consumption.
The Economy Ministry forecasts GDP to grow 1.6 per cent year-on-year in 2010, as signs of recovery emerged in recent months. The Central Bank maintained an expansionary monetary policy by cutting its benchmark interest rate by 100 basis points – one per cent – to 10.5 per cent during the quarter, due to easing inflationary pressures and efforts to support the economy.
In Turkey, fiscal stimulus measures coupled with monetary easing supported recovery with GDP decline showing signs of bottoming. GDP contracted seven per cent year-on-year in the second quarter of 2009, compared to a 14 per cent decline in the preceding three-month period.
Consumption recovered significantly, with private consumption contracting just one per cent year-on-year, compared to a 10 per cent year-on-year decline in the previous quarter. Moreover, the Central Bank maintained an expansionary monetary policy during the third quarter to support the domestic economy.
While the global economic crisis did interrupt some of the emerging markets growth momentum, we expect the long-term growth of these markets to continue. Although we are optimistic about the markets' upside potential, it is important to realise 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. We therefore must pay attention to valuations and long-term earnings growth prospects in order to avoid buying or holding expensive stocks as a result of dramatic price rises that we have seen. Most important for value investors, the current valuations of emerging markets remain attractive.
Emerging markets offer a number of important advantages to investors and there are very good reasons why a positive long-term view of these markets should be adopted. Most importantly, emerging markets are still expected to grow at a faster rate than developed markets.
Looking at the stability and safety of emerging markets, it is important to note the accumulation of foreign exchange reserves, which puts these economies in a strong position to weather external shocks.
The views expressed are the author's
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