Current capital market report on the Emerging MarketsPublish date: 15-11-2011
In October, a robust recovery started on the stock markets in the Emerging Markets (EM) and the developed industrialised countries. The US S&P 500 index booked a gain of around 13%, producing its strongest monthly performance since 1974 and recouping all of the losses since the beginning of the year. Stock indices in many of the Emerging Markets also reflected doubledigit percentage gains. In part, this development was a short-term reaction to the sharp losses from the previous months: with the very negative mood on the market, it did not take much positive or even just somewhat less negative news to spur buying interest and move investors with short positions to start buying back assets. This was all facilitated by the increasingly solid signs of an agreement within the Eurozone on how to proceed in relation to the Greek debt crisis.
Although no long-term solution to the fundamental problems was found, policymakers were at least able to buy some more time again. The markets also seem to be getting rather tired of this issue, after more than a year during which the Eurozone's sovereign debt crisis has dominated market developments with an unending stream of proposals for solutions, shortfalls running into the billions, denials, bad news and the occasional ray of hope here and there. In such an environment, any more positive news is cause for relief, even though the underlying problems have by no means been solved. After all, with the compromises reached after excruciating negotiations it appears possible that the firepower of the European stability fund EFSF will be increased significantly, even though its volume will probably still not be adequate to bail out countries such as Spain or Italy and to also recapitalise the teetering European banks if necessary. In relation to Greece, an "orderly” debt reduction scheme is taking shape, although the currently planned version may not turn out to be the final one. With a 50% haircut on banks' claims, Greece will only be able to reduce its debt level to twice as high as the upper limit set forth in the Maastricht criteria. The announcement of the Greek PM that the budget deficit would be reduced to zero in 2012, will probably once again quickly fall victim to reality, in light of the experiences from the last 24 months and the enormous economic problems facing Greek.
For the USA, the EU and Japan, it is quite likely that there will be a recession in the quarters to come, considering the structural and cyclical problems facing these economies. By contrast, in most of the Emerging Markets economic growth should remain in positive territory, but also weaken tangibly. In relation to China, worries about a "hard landing” for the economy seem to have faded recently. Even though the EM economies will certainly not be able to decouple from the developments in the EU and the USA, we still believe that most of the Emerging Markets are well prepared for a global economic slowdown, thanks to their improved financial resources and their strongly growing domestic markets. With regard to the economies of Central and Eastern Europe, however, there is still a risk that the recession will be even more severe than in the Eurozone, if the debt crisis there continues to escalate and/or the governments pass even more draconian austerity measures than already planned.
The latest economic data in China have eased the worries about a hard landing for now. The Q3 GDP data which were released, the purchasing managers' index and many of the other economic data were interpreted positively. Q3 GDP came in at +9.1% yoy, slightly lower than the annualised figure for the previous quarter (9.5% yoy) and below consensus. In respect of the PMI, increases were mainly seen for new orders, and in particular for the export sector. At the same time, the slowdown in Europe was also reflected in Chinese exports to Europe, which slipped by almost 7% in September compared to the previous month. On the whole, the economic picture painted by the indicators can be described as stabilisation at best. There continue to be signs of moderate deceleration for the months ahead. This will be underscored by the slowdown in the international economic environment and the restrictive monetary policy stance in recent months.
In respect of Chinese monetary policy, there may be some easing again around the turn of the year, in the fields of minimum reserves and lending regulations. Optimism has also returned to the struggling Chinese equity market. A positive result was registered again for October, with Chinese shares in Hong Kong posting much larger gains than the A-shares in Shanghai. The increases in share prices occurred on the back of rather thin trading though. One should thus not interpret this as the start of a new, sustained uptrend for Chinese shares.
India's central bank once again raised the key rate by 25bp to 8.5%. The move was explained with the high rate of inflation, which has been stubbornly entrenched above 9% for the last 10 months. At the same time, the central bank indicated that further rate hikes (at the next policy meeting in December) would not be necessary. From December, the bank expects to see a stronger decline in the inflation data and economic activity is already flagging severely. At the same time, the Indian central bank remains vigilant: inflationary pressure will mount again if the government misses the targeted central budget deficit of 4.6%. India's equity market bounced back strongly last week, in line with the international trend. The market also drew support from the outlook for an end to the current rate hike cycle. Nevertheless, international economic developments and the capital market scenarios do not presently suggest that a durable turnaround in the trend has occurred. This also holds true for most of the currencies in the Emerging Markets, including the Indian rupee. As long as investors' risk tolerance remains low, the upside potential for the Indian stock market will remain relatively limited.
Growth expectations for 2011 and next year have been lowered even more, and the economy is now projected to expand at a rate of less than 3%, instead of the earlier real increase of 4%. The central bank reacted with a rate cut of 0.5%, bringing real interest rates to a relatively low level by Brazilian standards. The economy is also threatened by inflationary pressures still. The Brazilian currency appreciated again slightly after booking sharp losses in September against USD, but in economic policy terms a weaker currency is certainly still desirable. Brazil's equity market was able to bounce back strongly in October, ending the period as one of the strongest Emerging Markets with a gain of around 14%. This recovery enjoyed a broad basis and conspicuously positive performance was seen for both banks and large caps.
The recovery in the Russian economy continues to lose momentum, and industrial production has slipped lower yet again. On the other hand, the outlook for private consumption is (still) positive right now: unemployment is declining consistently, retail sales are robust and real wages are growing at a stable pace. The biggest factor of uncertainty for Russia is, as usual, the development of oil prices. The price of oil increased sharply in October, causing the rouble to appreciate versus the EUR-USD currency basket and as a result, RUB was one of the strongest performers for the month. In this environment, prices of Russian bonds also rose, while yields dropped relatively strongly in October.
Measured with the MICEX, the Russian equity market bounced back from its deep losses in the previous month, posting a gain of around 10%. Oil&gas names profited particularly from the resurgent oil price, and the share prices of pipeline operators were borne higher on expectations of stronger deliveries to China. Other commodity-related names, miners and steel producers, and bank shares also saw a turnaround in the development of share prices.
Turkey's biggest challenge is still the high current account deficit. In order to prevent the C/A deficit from swelling even more, the central bank took measures during the year to weaken the Turkish currency and thus make imports more expensive and exports cheaper. Nonetheless, there has still not been any sustained decline in the country's current account deficit. On the other hand, inflationary pressure is mounting due to higher import prices, and consequently the central bank has changed its tone in favour of measures to strengthen the currency again. Such steps include the provision of abundant liquidity via daily USD auctions and the reduction of the minimum reserve rates for bank deposits (whereas the key rate was left unchanged). This has arrested the depreciation of the Turkish lira. During October, TRY remained almost unchanged compared to EUR and was able to appreciate against USD. Turkish bonds, however, were negatively affected by these measures, and there was an intense increase in yields over the month.
The ISE-100 index for the Istanbul stock market was one of the few stock indices that fell significantly lower in October, but one must also keep in mind that the Turkish market was also able to post a gain in September, in contrast to the global trend. The biggest losers were banks, whereas industrials, energy and mining stocks saw above-average performance.
The result of the Polish general elections in October was that - for the first time ever since the end of the socialist system - a governing party was able to defend its majority: consequently the PO party (Civic Platform) can continue its coalition government with the PSL (Polish People's Party). A challenging agenda lies in store for the Polish government, in particular as leeway for necessary reforms and economic stimulus measures has narrowed for CEE's once brightest star (in 2008, Poland was the only EU Member State to emerge from the global economic crisis without slipping into recession). Weaker economic data, high levels of public debt, and the negative current account developments will all restrict the ability to keep the ongoing process of reform moving forward. Hence, it does not look like Poland will be able to once again decouple from the developments affecting the region. Recent industrial production and retail sales in Poland were again surprisingly strong however. In the months to come though, economic activity will taper off and the leading indicators are clearly pointing to a slowdown. During the month, inflation was surprisingly tame and rose less than expected; accordingly, it is currently not one of the main worries for market participants. As risk appetite returned to the markets, gains were recorded by Polish bonds and for the zloty as well.
The Polish equity index WIG20 was able to broadly recoup its September losses in October.
Demand was particularly strong for banks, energy and industrials.
The economic slowdown in Western Europe is also being reflected in developments in the Czech Republic's trade figures. Exports recently fell off dramatically, and leading indicators are pointing to further weakening. Economic activity will thus probably remain sluggish in the coming months. Compared to Poland for example, the Czech Republic would be much more severely affected by a protracted decline in Western European demand, in particular since Czech domestic demand still shows no signs of recovery. The Czech parliament recently passed an increase in VAT and significant cuts in social spending to help lower the budget deficit, but this will also weigh down domestic economic activity even more. In this environment, at least there are no problems with Czech inflation, as the year-on-year rate of +1.8% remains within the central bank's targeted range and so there is no need for the monetary authorities to intervene in this sphere. Accordingly, the central bank can concentrate on economic conditions and in the event of a more pronounced slump in the growth prospects, a rate cut would even be possible.
Right now, the key rate is still at the record low level of 0.75%. CZK was mildly stronger inOctober, but this was unable to compensate EUR-based investors for the decline in prices of Czech government bonds.
The Czech equity market closed the month almost unchanged and thus lagged well behind the performance of most of the other markets in the region. Energy sector stocks showed better performance, whereas financials were weaker.
Considering the present conditions, Hungary's trade balance is holding up quite well. Inflation was the only positive surprise recently, as prices increased slightly more slowly than expected, at an annual rate of 3.4%. If inflation dynamics continue to taper off, as projected by the central bank, there might be some leeway for cutting interest rates. Due to the intense turbulence on the market and the persistent weakening of the forint, however, this would be a difficult path to follow.
In contrast to the other regional currencies, HUF was unable to profit from the developments in October, and investors are especially critical of the current government plans. It is also possible that the rating agencies will move to downgrade Hungary in the weeks ahead. Despite this, prices of Hungarian bonds were able to increase modestly, although the weakness of the forint overshadowed this gain for EUR-based investors. Over the long term, the level of Hungarian yields still looks attractive, but over the short term more strong volatility can be expected.
In September, the Hungarian equity market's performance was the weakest in the region with a decline of around 15%, and in October the market turned around as one of the strongest, recouping most of the earlier losses. The BUX index was buoyed by pharmaceuticals in particular, with energy and banking names also pushing higher.
This document was prepared and edited by Raiffeisen International Fund Advisory GmbH, Vienna, Austria ("Raiffeisen Capital Management" or "RIFA").
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