Emerging Markets See Marginal Correction as Global Political Risks Rise
Emerging market equities saw a moderate correction in February, broadly similar to the rest of the world. Prices reacted negatively to renewed concerns of a worsening European fiscal crisis as the results of the recent Italian elections turned out to be inconclusive. The elections showed deep public sentiment against the austerity measures that are widely seen as inevitable for solving the region’s crisis. If this public opposition persists across southern Europe, markets are apprehensive that policy makers will have to delay the lower government spending envisaged in negotiations since last year. Investor sentiment was also hurt by warnings from the International Monetary Fund and other institutions that government spending cuts in the U.S. could lower global growth in the current year.
While the 2012 fourth quarter GDP growth data releases have been mostly positive, the pace of expansion in select economies such as India and Brazil were below expectations. Brazil has been one of the worst performing major emerging economies in the recent past, while the growth rate in India has also slipped significantly since the 2009 rebound that followed the global crisis. However, it is considered likely that these economies have bottomed out as other key trends have continued to suggest improvement during the first two months of this year. During the month of February, manufacturing output growth accelerated in India and Brazil, as well as in Mexico. In China, factory activity continued to expand, though the pace was marginally weaker when compared to January. Among the other major emerging economies, Russia, Indonesia, and Taiwan also saw manufacturing expansion during the month.
Near-Term Outlook
More than the risk of a worsening fiscal crisis and recession in Europe, the potentially slower growth in the U.S. following the sequestration could be more damaging to the outlook for the emerging economies. Healthier demand from the U.S. had led to a revival in export shipments from several countries in Asia and Latin America since the second half of last year, even as European demand remained weak. If the U.S. economy slows down from current expectations, it could make the export growth outlook for the emerging markets more uncertain.
More so in the current environment where currency movements triggered by aggressive monetary policies of some countries could adversely affect the export competitiveness of others. Nevertheless, the impact of the U.S. spending cuts is not expected to be as calamitous, with other sectors of the U.S. economy showing healthier trends. U.S. consumer sentiment has recovered after declining towards the end of last year, mostly in anticipation of the scheduled increase in payroll taxes, which is positive for export growth in Asia and elsewhere.
The Chinese government has formally emphasized the shift away from its earlier growth strategy driven by exports and investments, and towards a more diversified economy with a growing share of domestic consumption. The government is planning to step up spending in sectors such as healthcare, while new regulations and taxes have been announced to contain property prices and make them affordable to people. The annual economic growth target has also been lowered to 7.5 percent, which suggests that the new leadership is prepared to accept moderately lower growth to limit the risk of overheating. More balanced growth in China, and in other major emerging economies, are widely believed to help more sustainable global expansion.
FORWARD LOOKING STATEMENTS
Certain statements made in this article may be forward looking. Actual future results or occurrences may differ significantly from those anticipated in any forward looking statements due to numerous factors. Thomas White International, Ltd. undertakes no responsibility to update publicly or revise any forward looking statements.
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