Emerging market equities

July 2010 (covering the month of June 2010)

Global emerging equity markets marginally failed to hold onto initial gains as fresh concerns about eurozone finances dented investor confidence amid a rise in market volatility. The MSCI Emerging Markets (US$) index declined by 0.9% during the month, a smaller drop than registered in developed markets. Emerging Asia was the outstanding regional performer – the only major region that managed to post a gain in June. Share prices here were supported by encouraging economic data, especially strong export growth. In a surprise decision China ended the renminbi peg against the US dollar to allow greater flexibility for its currency. Weaker commodity prices and higher interest rates soured investor sentiment in Latin America with Brazilian stocks underperforming. With investors becoming more risk averse amid fears that the fiscal woes affecting the peripheral members of the Eurozone could spread to other regions, equities in emerging Europe, particularly in Hungary, came under pressure.

Although the MSCI Latin America (US$) index fell by 3.4%, economic news from the region continues to be upbeat. Year-on-year retail sales in April increased by 9.1% and 22.4% respectively in Brazil and Chile. In an effort to combat inflationary pressures, some central banks in the region raised interest rates. Brazil’s selic-rate was raised by 75bps for the second consecutive time and now stands at 10.25%. The cost of borrowing was also increased in Chile and Peru. By contrast, the key overnight rate in Mexico was left unchanged at 4.5% as inflation is below 4% and consumer spending still remains sluggish. In political news, Juan Manuel Santos took 69% of the election vote on 20 June and will become Colombia’s next president. He is expected to continue with market-friendly policies.

The lack of a clear resolution to the fiscal woes in the Eurozone and a sovereign default scare from Hungary prompted broad weakness in emerging European equities, apart from Turkey where macro news continues to be good. Although stocks in Hungary dropped the most, the danger of a sovereign default is slim given that the country’s debt/GDP ratio this year is expected to be 79% (source: EU), in line with the EU average and far below Greece’s projected 125%. The credit backdrop in emerging European countries is significantly better than many Eurozone members. In a positive sign, Fitch revised the Czech Republic’s sovereign rating outlook to positive from stable. Underscoring that the Russian economy is still accelerating, first quarter industrial production here was revised upwards.

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