May losses erase four-month gains

Emerging markets corrected in May 2010. Greece's financial woes and worries that Portugal, Spain and Ireland may have similar problems triggered a sell off during the month.

The sinking of a South Korean naval ship by a North Korean torpedo and rioting by political protestors in the Thai capital of Bangkok only added to the negative sentiment. Losses in May more than erased the gains recorded in the first four months of 2010.

Despite the announcement of unprecedented support for Greece totalling close to $1 trillion (Dh3.67trn) from the European Union and International Monetary Fund, investor sentiment remained weak, resulting in net outflows from emerging markets.

The MSCI Emerging Markets index declined 8.8 per cent in US dollar terms. Weaker emerging market currencies further affected market performances in US dollar terms. In Asia, while the South Korea market underperformed due to heightened anxieties, Thailand's stock markets remained resilient with the MSCI Thai index outperforming its peers with a 2.7 per cent decline in US dollar terms. Elsewhere, Latin American markets performed in line with their emerging market counterparts, while markets in Eastern Europe ended May with double-digit declines.

Higher commodity prices continued to affect China's trade surplus as high import bills for commodities led the surplus to total $1.6 billion in April, a fraction of the $13.1bn recorded a year earlier. This was, however, an improvement from the deficit in March 2010. Imports jumped 50.1 per cent year-on-year to $118.2bn in April. Exports, on the other hand, increased 30.4 per cent year-on-year to $119.9bn.

Regional update: Asia

China continued implementing measures aimed at cooling the property market in April. In Beijing, these included restricting families from buying more than one residential property. Aimed at improving trade and economic relations with global partners, Chinese officials met delegations from Japan, the European Union, Jordan, Bosnia and Herzegovina and Seychelles.

In South Korea, investors bailed out of the Korean won as well as stock markets on fears of a North/South war after the government unveiled evidence that the recent sinking of a South Korean naval ship was caused by a North Korean torpedo. In response to rhetoric from North Korea, South Korean President Lee Myung-Bak announced a number of sanctions against its Northern neighbor. We believe these sanctions will, in the long run, be positive since it may accelerate change in North Korea and result in a move towards opening up that country. In short term, of course, there will be anxiety, which could impact the markets. However, despite all the geopolitical concerns, South Korea has continued to grow its economy.

India's industrial sector continued to record strong growth in March due to strong domestic and external demand from China. Industrial production grew 13.5 per cent year-on-year, its sixth consecutive month of double-digit growth. It was however, slightly lower than the 15.1 per cent year-on-year increase in February. The trade sector staged a robust recovery in February as comparisons with last year's weak performance, due to the global economic crisis, led to strong growth numbers in 2010. Exports jumped 34.8 per cent year-on-year to $16.1bn, while imports surged 66.4 per cent year-on-year, resulting in a trade surplus of $9bn. Inflationary pressures eased slightly in April with wholesale prices increasing 9.6 per cent year-on-year, compared to 9.9 per cent year-on-year in March. This was significantly higher than the 0.5 per cent year-on-year increase in September 2009. Key culprits included high food and commodity prices.

Latin America

Domestic demand in Brazil continued to strengthen with retail sales increasing at its fastest pace since the national statistical office began maintaining sales records. Retail sales rose 15.7 per cent year-on-year, its third consecutive month of double-digit growth, and higher than the 12.2 per cent year-on-year growth in February. Consumer prices rose 5.3 per cent year-on-year in April, in line with the 5.2 per cent year-on-year increase in March. The trade sector also continued to report positive data for April. Exports were up 23.0 per cent year-on-year while imports surged 60.9 per cent year-on-year, due to strong domestic demand and higher commodity prices. While April's trade surplus of $1.3bn was nearly double that of March 2010, it was still lower than the $3.7bn recorded in April 2009.

Africa

South Africa's budget deficit totalled 6.8 per cent for the fiscal year 2009-10. This was lower than the 7.3 per cent forecast by the Treasury in February mainly due to higher than expected tax revenues and lower than estimated government spending. The manufacturing sector continued to benefit from a recovery in domestic as well as global demand. Manufacturing output increased 6.3 per cent year-on-year, more than double the 2.7 per cent year-on-year increase in February. Domestic demand could further benefit from the 2010 World Cup which begins in June. President Jacob Zuma announced the creation of a National Planning Commission which was tasked with the production of national development plans for the country.

Europe

Russia's GDP grew 2.9 per cent year-on-year in the first quarter of 2010, according to preliminary data, as the government's stimulus measures coupled with higher oil prices and lower interest rates supported the domestic economy. In comparison, GDP contracted 3.8 per cent year-on-year in the final three months of 2009 and 7.9 per cent year-on-year for 2009. Russia continued to report encouraging data with industrial output recording double-digit growth for the first time in close to three years. Output rose 10.4 per cent year-on-year in April compared to an increase of 5.7 per cent year-on-year in March. Strong growth in the manufacturing sector was the key driver.

Inflationary pressures continued to ease in April with consumer prices increasing six per cent year-on-year, compared to 6.5 per cent year-on-year in March, partly due to a stronger rouble.

In Turkey, the industrial sector continued to record strong growth with output increasing 21.2 per cent year-on-year in March, its fourth consecutive month of double-digit growth and an increase from the 18.1 per cent year-on-year growth in February. Russian President Dmitry Medvedev visited Turkey in May, signaling positive developments in relations between the two countries. A total of 17 agreements covering a range of areas including energy and tourism were signed during the summit. Turkey also announced its readiness to begin Free Trade Agreement talks with Malaysia.

- The author is Executive Chairman, Templeton Asset Management. The views expressed are his own

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